Fabrice Taylor, CFA, publishes the President’s Club investment letter. His letter and The Globe and Mail have a distribution agreement. You can get a free copy here.
This article is part of Report on Business Magazine's annual top 1000 rankings. See the full website here.
Even stock market bargain hunters are unlikely to opt for an investment in Yellow Media over TD Bank. The former has one foot in the grave, while the latter is a big, stable and highly profitable going concern that led the pack in corporate Canada last year with earnings of almost $6 billion. Yellow Media brought up the rear with a loss of close to $3 billion.
Having said that, I suggest that you not get star-struck by the perennial profit leaders at the top of our annual Top 1000 ranking. They aren’t necessarily the best bets for future investment returns. Scouring the nether regions of the list for promising candidates can be far more lucrative.
A year ago, I recommended that investors pay attention to several names near the bottom, and that advice worked pretty well. Intertape Polymer, which was No. 958, proved to be the best-performing major stock on the TSX over the past year. Onex, at No. 953, also beat the market. Valeant Pharmaceuticals’ share price was flat, however, and Manulife declined sharply as low interest rates continued to ravage all life insurers.
Many of last year’s Top 1000 leaders didn’t fare well in the stock market. Royal Bank, which was No. 1, and TD Bank both posted negative returns, even if you include dividends.
This year, the top 10 companies on the list are again familiar: big banks and resource companies. The bottom 10, however, are more disparate. Besides battered Yellow Media, they include blue-chip Thomson Reuters and little-known Pinetree Capital, a small resource-investment boutique.
But if you look at the last 50 or so, you’ll see lots of resource firms with similar basic problems. Some of them lost money due to write-offs, but many of them never make any real money. Their investment returns are usually based more on market sentiment than anything else.
Outside the resource firms, you’ll obviously want to avoid Yellow Media. Thomson Reuters has much better prospects. (The Thomson family controls The Globe and Mail). It’s struggling with poor conditions in the financial sector and integration challenges, but it looks poised to start a gradual comeback. The stock isn’t dirt cheap, yet the dividend yield is almost 5%. Air Canada could be an interesting bet if oil prices drop. Cheaper fuel can really move the profit needle at an airline, although Air Canada has a lot of other issues.
Armtec Infrastructure makes industrial products like big drainage systems for agricultural and municipal use. The Guelph, Ontario-based manufacturer is wounded, but it could survive. Armtec announced a surprising and staggering series of quarterly losses last year, suspended its dividend and watched its book value and share price shrivel. It has a fair amount of cash, but lots of debt, too, and that makes it risky. Aimia (No. 943) is the former Aeroplan, but it’s now much bigger, having added loyalty programs in Europe. The company seems to have legs after digesting some acquisitions.
As for the marquee names at the top of the Top 1000, much of what I said last year still applies. The banks have done well for three decades, but that was largely due to lower taxes, regulatory changes and declining interest rates. They are likely to perform much more modestly now.
With commodity prices at risk, resource firms will also have trouble getting traction. Barrick Gold hasn’t given shareholders anything for a decade. BCE (No. 13) might do well simply because its dividend yield is healthy and investors looking for income will likely flock to low-volatility, high-yield stocks.
By and large, however, it will probably be a more rewarding strategy to roll up your sleeves and sift through the dirt to look for bargains.
The Top 1000 rankings in ROB Magazine and this website only provide a limited snapshot of data for the top 1000 companies in Canada. The full database provides a complete guide to corporate performance in Canada, with comprehensive shareholder information and can be purchased here. This year, Report on Business magazine is offering four individual products for download. Compatible with most spreadsheet software programs, the download files are indispensable tools for business development, sales targeting, and investing.