What are we looking for?
Canadian stocks that are unloved, but not overvalued.
While being popular might have worked wonders in high school, a portfolio full of equities the analyst community likes the most isn't a sure ticket to topping the index's performance.
Experts have good reasons for being pessimistic about a company's prospects, but their crystal balls are often just as foggy as everyone else's. A contrarian approach is certainly not for the faint of heart, but one who follows the crowd will have a difficult time beating it.
How did we do it?
We screened for Canadian stocks with a minimum of three recommendations from analysts in which the average rating was three or less.
A rating of three typically constitutes a "hold." (Five is a "buy" and one is a "sell.") The number of stocks deemed to be a "buy" by analysts typically dwarfs those with "sell" ratings, so the lack of enthusiasm indicated by a neutral rating or lower serves as sufficient proof that the stock is unloved.
To avoid stocks that analysts may dislike due to stretched valuations, we screened for stocks that have a forward price-to-earnings ratio of less than 16, which is close to the multiple for the S&P/TSX composite index as a whole.
What did we find?
Financials, the largest-weighted sector on Canada's benchmark index, make up a considerable share of this list. National Bank of Canada will be the name most familiar to domestic investors. Though prospects for domestic growth appear to be muted, the bank's 4.1 per cent dividend yield remains an attractive feature.
On a consensus basis, stock analysts had the lowest opinion of GMP Capital Trust, which likely has a lot to do with its exposure to resources. Continued softness in metals and the significant decline in crude oil prices threaten to adversely affect M&A advisory and debt-underwriting opportunities in these segments. However, in its third-quarter earnings report, the company indicated that non-resources investment banking revenue rose by 36 per cent compared to the same period in 2013.
Another stock worth highlighting is Transcontinental Inc., which trades at a single-digit multiple on a forward and trailing basis despite posting solid returns this year and boasting a dividend yield close to 4 per cent.
Investors might also be surprised to see that there's only one company from the energy sector on this list – Imperial Oil Ltd. Had we included companies with a forward price-to-earnings ratio in excess of 16, many more firms from this segment (including Canadian Oil Sands Ltd.) would have made the cut.
Investors are advised to do their own research before investing in any stocks listed here.