What are we looking for?
Undervalued middle and large capitalized companies in Canada that are yielding more than the S&P/TSX composite index.
The screen
In a low-interest-rate environment, investors tend to look for yield and stability in stocks. Many economists believe that Canada's accommodative monetary and fiscal policy should prevent a recession and, in turn, give a green light for equities to continue to rally. Although risks in the energy sector, consumer debt and political risks from the coming U.S. election are still looming, it's safe to say that the Canadian economy should improve in the coming year – especially while piggybacking off a strengthening U.S. economy.
Our screen begins by identifying companies trading in Canada with a market capitalization above $1-billion and a dividend yield greater than that of the S&P/TSX composite (3.05 per cent).
Next, we are looking for companies that are undervalued from a relative valuation standpoint. Specifically, we want the forward-price-to-earnings and price-to-cash-flow ratios for these companies to be less than the median of their respective industry groups in Canada.
More about Thomson Reuters
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What did we find?
Using Thomson Reuters Eikon, our screen identified 16 companies that meet the screen criteria. Sorting the list by the discount in the forward P/E of the company compared with that of the industry, Superior Plus Corp. tops the list. Superior Plus, a diversified business operating in energy services, specialty chemicals and construction products distribution, has seen gains of roughly 14 per cent year-to-date on a total return basis. A potential for growth in energy services because of increased activity in the oil and gas sector, accompanied by potential acquisitions in energy distribution, could lead to increased gains in the stock over time. Potential risks include a stronger than expected Canadian dollar, lower chemical prices and a weaker construction market in the U.S. and Canada.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Patrick Gattuso, CFA, works in the financial and risk unit of Thomson Reuters and specializes in asset management.