Monday’s TSX breakouts: Three stocks with forecast returns between 37% and 46%

On Friday, the S&P/TSX composite index plunged over 200 points, or 1.4 per cent, with every single sector closing in the red. Within the Index, just 23 stocks advanced, 209 declined, and two securities were unchanged.

Given the market weakness on Friday, today's Breakouts Report is short. The number of securities on the positive breakouts list (stocks with positive price momentum) declined to 18 names, and the number of securities on the negative breakouts list (stocks with negative price momentum) increased to 14 names.

Year to date, the TSX Index is up 7.9 per cent, led by the materials sector.

Within this top performing sector, gold stocks have been leaders, delivering spectacular year-to-date returns. However, looking forward, strong performance is expected to come from other sub-sectors.

In fact, the top three stocks in the S&P/TSX composite index, with the highest forecast returns, based on the average one-year price targets by analysts are not gold stocks.

First up is Dominion Diamond Corp. (DDC-T).

According to Bloomberg, this stock has seven buy recommendations and one hold recommendation, with the one-year average price target at $20.15, implying a potential 46-per-cent return.

Next up is Canfor Corp. (CFP-T) with seven buy recommendations and two hold recommendations, and the average one-year price target at $20.17, implying a potential gain of just under 46 per cent.

In third place is West Fraser Timber Co. Ltd. (WFT-T) with eight buy recommendations and one hold recommendation. The average one-year price target is $55.14, implying a potential gain of 37 per cent.

Discussed below a stock from the materials sector, Cascades Inc. (CAS-T), which appears on the positive breakout list.

It is not included in the S&P/TSX composite index as it's a small cap stock, with a market capitalization of approximately $964-million.

While this stock is from the top-performing materials sector, it has been a laggard; however, analysts on the Street are forecasting a healthy 10-per-cent gain over the next 12 months as the stock price is expected to continue to recover.

A brief outline is provided below that may serve as a springboard for further fundamental research.

The company

Quebec-based Cascades produces and markets packaging products, which includes containerboard, boxboard, and specialty products. Examples of packaging products include cardboard boxes and packaged food boxes such as cereal boxes. The company is also the market leader in tissue paper products. Examples of tissue products include tissues, toilet paper, and paper towels. This is a global company with sales in Canada, the U.S., and Europe.

As of the end of the first-quarter, containerboard was the largest contributor to earnings before interest, taxes, depreciation and amortization (EBITDA) over the past 12 months, representing 47 per cent, followed by tissue products at 27 per cent. Boxboard and specialty products were evenly split at 13 per cent each.

Before the market opened on May 5, the company reported first-quarter financial results that were in-line with expectations with EBITDA coming in at $106-million. The stock price rallied 3.7 per cent.

Management's outlook was cautiously optimistic. The earnings press release stated, "Despite recent North American price decreases in Containerboard and the recent strengthening of the Canadian dollar, our packaging groups should continue to deliver solid performance as they enter a period of seasonally improved market conditions over the next two quarters. In a similar view, we anticipate that our Tissue Papers Group will continue to benefit from improved sales and cost reduction initiatives, while market conditions in Europe are expected to remain soft as order intake continues to lag the pace achieved last year. Notwithstanding the fact that business conditions may be volatile, we will continue to carefully manage our financial situation in order to direct a significant portion of our free cash flow to debt reduction."

The company has been steadily reducing its debt levels. Last quarter, net debt-to-adjusted EBITDA ratio stood at 3.8 times.

Dividend policy

The company pays shareholders a quarterly dividend of 4 cents per share, or 16 cents yearly. This equates to an annualized dividend yield of 1.6 per cent.

Valuation

The stock can be evaluated on a sum-of-the-parts basis, applying a multiple to each of the four business segments, resulting in a blended enterprise value-to-EBITDA (EV/EBITDA) multiple.

According to Bloomberg, the stock is trading at an EV/EBITDA multiple of 6.6 times the 2017 consensus estimate, which is slightly above its three-year historical average of 6.4 times.

Analysts' recommendations

According to Bloomberg, the one year price target is $11.17, which is based on four buy recommendations, one hold recommendation, and one sell recommendation with individual price targets are as follows: $8, two at $11, $11.50, $12.50, and $13. The average target price suggests the stock price may potentially increase 10 per cent.

The consensus EBITDA estimate is $428-million in 2016, contracting to $413-million in 2017. The Street's earnings per share estimate is $1.29 in 2016, declining to $1.22 in 2017.

Chart watch

Year to date, the share price has declined 20 per cent; however, the chart is improving. The 50-day and 200-day moving averages are both rising, which is encouraging.

There is initial overhead resistance around $11, and large resistance around $14, which is close to its January 2016 peak of $13.47. There is initial downside support at $10, which is close to its 200-day moving average (at $9.91), and failing that around $9, near its 50-day moving average (at $9.15).

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company's dividend policy, analysts' recommendations, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Below is a list of securities principally from the S&P/TSX composite index and the S&P/TSX Small Cap index that are technically breaking out, reaching new 55-day highs or lows. Securities on the positive breakouts list have displayed positive price momentum during this period. Securities on negative breakouts list have experienced negative price momentum.