What are we looking for?
Looking at all the stocks on the TSX, we want to screen for the highest-ranking telecom and utilities names, two popular sectors for dividend-hungry investors. Rankings are determined by the INK Edge V.I.P. criteria (valuations, insider commitment and price momentum). This is the same approach we apply across the broad market to determine membership for the INK Canadian insider index, which is used by the Horizons Canadian Insider Index ETF (HII-T).
The screen
Our universe includes some 800 TSX-listed stocks that meet minimum size and liquidity requirements. We are looking for stocks in the two sectors that rank in the top 30 per cent of all stocks in the market. This month, we relax our minimum size constraint for our final list. To make the grade in this screen, a stock must trade over $1 and have a market cap of at least $50-million.
We begin by determining a stock's rank in each V.I.P. category based on equally weighted factors.
Valuations (past 12 months except dividend yield)
- price-to-earnings, price-to-book and price-to-sales ratios;
- enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization);
- price-to-cash flow or price to cash;
- shareholder yield (buybacks plus dividends).
Insider (officer and director) commitment
- recent net insider buying;
- personal holdings (excludes shares held for other investors);
- insider intensity, based on the number of insiders buying.
Price momentum
- based on three-, six- and 12-month returns.
Next, each V.I.P. category rank is equally weighted to determine a composite ranking.
In context
The percentile V.I.P. category and composite rankings are in relation to all other stocks in the market. Rankings are between 0 and 100, the higher the better.
A composite ranking over 90 goes into the top decile "sunny" outlook category. A composite ranking between 70 and 90 goes into the next two deciles, the "mostly sunny" category. INK sunny and mostly sunny outlook categories are designed to identify groups of stocks that have the potential to outperform the market. But keep in mind that even if a particular stock has a bright outlook, it could still rain on your portfolio's parade. Diversification remains key.
What we found
Only eight names made the list. The low number means that insiders are signalling that now is probably not a great time to be searching for yield in today's market environment. Indeed, the top ranked stock is microcap Redline Communications, which does not even pay a dividend. While some large stocks such as Quebecor Inc., Emera Inc. and Atco Ltd. make the screen, notably absent from the list are larger and more widely recognized names BCE Inc., Fortis Inc., Rogers Communications Inc. and Telus Corp.
Investors should conduct further research before buying any of the companies listed here.
Ted Dixon, CFA, is CEO of INK Research, which provides research and alerts on insider trading reports in Canada and the United States. Please visit CanadianInsider.com to find out more about INK services and insider reporting in Canada. INK staff may also hold a position in profiled securities.