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What are we looking for?

A diversified group of undervalued Canadian companies.

The screen

Four months into 2017 and we continue to see equity markets rally forward. The S&P/TSX composite total return index extended its streak with a 15th consecutive positive monthly return, a record number dating back to 1956. Over this 15-month period beginning Feb. 1, 2016, the index has gained 26 per cent. The surge has some investors questioning whether the market still has room to run or if valuations have gone too far ahead of themselves.

In order to search for a diversified mix of potentially undervalued Canadian companies, my colleague Lawrence Ullman and I used Morningstar CPMS to find the top 15 companies above $300-million in market cap with the best mix of:

  • forward price-to-earnings ratio;
  • forward price-to-cash-flow ratio;
  • price-to-book ratio;
  • price-to-sales ratio;
  • Consensus earnings-per-share estimate revision over the past three months (cannot be worse than minus 5 per cent).

For diversification, the list was restricted to no more than two stocks a sector.

More about the Ullman Group

The Ullman Group is a provider of strategic private capital management services to high-net-worth individuals, corporations, endowments, charities and foundations.

What we found

Using CPMS we performed a back-test starting March 31, 2007, initially selecting an equally weighted portfolio of the top 15 qualifying stocks and each month replacing those that were no longer in the top 30 per cent of the rankings or if earnings revisions fell by more than 15 per cent.

Over the entire period, this strategy would have generated an annualized total return of 7.4 per cent compared with 4.7 per cent for the S&P/TSX composite total return index.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates.

Investors should contact a professional or do their own research before investing in any of the stocks shown here.

Craig McGee, CFA, is a portfolio manager and Lawrence Ullman, MBA, is a director, wealth management and portfolio manager with the Ullman Group at Richardson GMP in Toronto.

Richardson GMP Ltd. is a member of Canadian Investor Protection Fund. Richardson is a trademark of James Richardson & Sons Ltd. GMP is a registered trademark of GMP Securities LP. Both used under licence by Richardson GMP Ltd.

Canadian companies that are potentially undervalued

RankCompanyTickerMarket Cap ($Mil)P/EP/CFP/B P/S3M EPS Revision (%)Dividend Yield (%)
1Centerra Gold Inc.CG-T2,
2HudBay Minerals Inc.HBM-T1,971.710.
3Bonavista Energy Corp.BNP-T714.816.
4Gran Tierra Energy Inc.GTE-T1,378.
5Magna Int'l Inc. MG-T21,
6Linamar Corp.LNR-T3,737.
7Aecon Group Inc.ARE-T950.
8Capital Power Corp.CPX-T2,448.317.
9Atco Ltd.ACO.X-T5,783.
10Celestica Inc.CLS-T2,456.411.410.
11Cogeco CommunicationsCCA-T2,613.413.
12Loblaw Companies Ltd.L-T30,344.
13Enercare Inc.ECI-T2,248.628.
14IGM Financial Inc.IGM-T9,911.
15Metro Inc.MRU-T10,540.717.410.

Morningstar Canada