What are we looking for?
The "January effect" is a calendar anomaly that happens in late December and early January. The general increase in buying follows the drop in prices caused by investors who sell off stocks at the end of the year to create tax losses to offset capital gains. The January effect is known to affect small caps more than mid and large caps.
We are thus looking for Canadian small cap companies with strong economic performance, revenue growth and conservative debt ratios.
The screen
We have screened Canadian companies with the following criteria:
- market capitalization between $50-million and $500-million;
- debt ratio of 50 per cent or less. The ratio is calculated by dividing the long-term debt by the invested capital;
- A return on capital of 10 per cent or more;
- An economic performance index, or EPI (return on capital divided by cost of capital) above 1.0. An EPI ratio of 1.0 or more indicates a company’s capacity to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation);
- A positive EPI change over the past 12 months. A positive result indicates a strengthening economic performance;
- positive revenue growth over 12 months and 24 months;
- positive free cash flow to capital. This ratio gives a sense of how well the company uses the invested capital to generate free cash flows, which could be used to stimulate growth, pay and/or increase dividends, reduce debt, etc. A positive figure is good; 5 per cent and above is excellent.
More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA (economic value added) model to quickly and easTily identify investment opportunities. In addition to providing detailed reports on more than 6,500 companies (Canadian and U.S. stocks and American depositary receipts), StockPointer also allows investors to create personalized filters and build custom portfolios.
What did we find?
Out of the 10 companies that fill our requirements, four stand out for different reasons. Security alarm firm AlarmForce Industries Inc. and e-commerce services company Points International Ltd. are the ones who generate the highest economic profits for their shareholders with EPIs of 3.7 and 2.9, respectively. That means every time AlarmForce invests a dollar, it generates $3.70 off profit after the borrowing costs are considered, which is a rate of return most large caps would envy. Even better, these companies have no long-term debt.
Internet services provider Tucows Inc. is also in a very good position considering it also has no debt, generates high and increasing cash flows and shows great revenue growth over 12 months and 24 months. Winery Andrew Peller Ltd. is appealing for its slower but steady growth. It also shows constantly increasing cash flows, and even offers a 2.34-per-cent dividend yield. That wasn't part of the filter requirements, but it's definitely a nice-to-have.
Investors should contact a professional or do their own research before investing in any of the stocks shown here.
Jean-Didier Lapointe is a financial analyst for StockPointer at Inovestor Inc.