What are we looking for?
Companies that are showing an improving ability to produce gushers of cash – and put that cash to good use. Such firms can be good investments.
How we did it
Our friend Craig McGee, senior consultant at CPMS Morningstar Canada, searched the Canadian stock market for companies that met four major criteria:
-high and increasing returns on invested capital (Mr. McGee measured this by looking at each firm's earnings before interest and taxes, and dividing this figure by the total amount of the company's debt and equity);
-high free-cash-flow yields;
-high free cash flow margins;
-a tendency over the past three months for analysts to increase their earnings estimates for the company.
To avoid the risk of investing in smaller firms, Mr. McGee required each company to have a market capitalization of more than $200-million.
He then searched for the 20 companies with the best combination of the above factors.
More about CPMS
CPMS, a division of Morningstar Canada, provides quantitative North American equity research and portfolio analysis to primarily institutional clients. It covers more than 700 Canadian and 2,200 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company's quarterly results to
make sure screens can perform correctly.
What we found
The 20 stocks highlighted by Mr. McGee come from many different industries and tend to be mid-sized outfits.
They have generally produced strong returns so far this year and for good reason – they are improving their operating efficiency and analysts expect further growth ahead.
Bargain hunters should take a close look at these companies. But, as always, remember that any stock screen is just a starting point. Do your own research before buying any of the names listed here.