What are we looking for?
Highly profitable Canadian blue chips.
The screen
Equities across the developed world have performed relatively well so far this quarter (since the beginning of April). Quarter to date (QTD), the S&P 500 is up 4 per cent, Europe's STOXX 600 has gained 3 per cent and Japan's Nikkei 225 has advanced more than 6 per cent.
Canada, however, is one of the few developed countries whose stock market has missed out on the action. With the S&P/TSX 60 down 1.4 per cent QTD, we look for profitable, blue-chip Canadian companies that can be had for good value.
In considering profitability, we will look at three measures: return on equity (net income divided by shareholders' equity), return on assets (net income divided by total assets) and net profit margin. We require at least 10 per cent, 5 per cent and 5 per cent, respectively.
To consider the second aspect – valuation – we look at two measures: the forecasted dividend yield, and the enterprise value (EV) to sales ratio. For the forecasted dividend yield we use Thomson Reuters' proprietary SmartEstimate, which gives more credence to analysts who have historically been more accurate, and to more recently made estimates. It is often more relevant to use earnings, rather than sales, in valuation ratios, but in this case we have already screened for profit margin, so the EV/sales ratio is appropriate.
More about Thomson Reuters
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What did we find?
Interestingly, this screen yields only five companies: the country's three big telecoms; Magna International Inc.; and Thomson Reuters Corp.
Among the telecoms, Telus Corp. in particular stands out. In 2015, the Vancouver-based firm announced a plan to invest $1-billion in Vancouver's fibre-optic Internet infrastructure, and it has significantly expanded its footprint in the city since.
Thomson Reuters has been upgraded twice over the past week – Macquarie upgraded from neutral to outperform and Deutsche Bank from hold to buy. Both also increased their price targets, to $70 (U.S.) and $50 respectively, for the New York listing, which is currently trading around $46.20.
Magna's stock has increased more than 16 per cent over the past year. It should be noted the auto sector would be particularly vulnerable to any changes U.S. President Donald Trump makes to the North American free-trade agreement, as individual auto parts often cross multiple borders several times before ultimately ending up in a finished vehicle for sale.
As always, investors are advised to conduct further research before investing in any of the stocks shown here.
Hugh Smith, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.