What we're looking for
The best Canadian telecom and cable stocks, as chosen by a StarMine award-winning analyst.
What we found
We consulted Dvai Ghose, head of research at Canaccord Genuity, who won a StarMine award this year for being one of Canada's top stock pickers. The stocks he chose generated 18 per cent more in returns than the comparable benchmarks last year.
Mr. Ghose said he keeps two main criteria in mind when picking stocks. For income stocks, he looks at free cash flow (FCF) yield. For growth stocks, he considers the ratio of total enterprise value (TEV) to earnings before interest, taxes, depreciation and amortization (EBITDA). A lower ratio suggests a company might be undervalued.
Here are his top picks
Telus Corp. It has the highest estimated free cash flow yield for the 2012 financial year, and it paid out only 45 per cent of its free cash flow in dividends. "This suggests to us that stock is relatively cheap and has good room for dividend growth due to FCF growth potential and a relatively low payout," Mr. Ghose said. He also points out that its core wireless markets in Western Canada seem less competitive than Ontario or Quebec, and it is enjoying strong TV and broadband market share gains from Shaw Communications Inc.
Cogeco Cable Inc. "We view it as a growth stock rather than an income stock at this time," Mr. Ghose said, pointing out its estimated enterprise value was 5.7 times EBITDA for 2011 and 5.3 times EBITDA for 2012. Cogeco is also exposed to less competitive risk than its rivals. Its core markets fall largely outside the areas where BCE Inc. plans to introduce Internet-protocol television, making it less vulnerable to losing subscribers.
Quebecor Inc. Quebecor's enterprise value is just 6.3 times 2011 EBITDA, compared with 7 times EBITDA for Shaw. "Wireless should sustain growth for Quebecor in a sector where growth is becoming increasingly challenging," Mr. Ghose said.
Read more about the StarMine award winners and their picks: tgam.ca/starmine