What are we looking for?
Canadian firms with foreign sales at reasonable valuations.
The screen
It's been a shaky start to 2016 for equity markets. Year-to-date, the S&P/TSX composite index is down 5.2 per cent, the S&P 500 index is down 6.9 per cent and the MSCI World Index is down 8.5 per cent. The Canadian dollar has also been quite volatile and is currently worth just over 71 cents (U.S.).
The sell-off may have created a number of buying opportunities as quality companies have been taken down with everything else. Canadian firms with significant revenue from foreign sources may also benefit from currency tailwinds, so my colleague Lawrence Ullman and I looked for potentially undervalued firms in the S&P/TSX composite with at least 30 per cent foreign revenue and the best mix of:
· Earnings yield (forward 12-month earnings per share as a percentage of latest price);
· Free-cash-flow (FCF) yield (forward 12-month FCF as a percentage of latest price);
· Price-to-book ratio;
· Forward return on equity;
· Three-month consensus earnings estimate revision.
More about the Ullman Group
The Ullman Group is an independent provider of strategic private capital management services to high-net-worth individuals, corporations, endowments, charities and foundations.
What we found
Using Bloomberg, we found 14 firms that met our criteria. Among those with the highest proportion of foreign revenue include three materials companies that tend to have low correlation to the sector itself: CCL Industries Inc., which focuses on specialized packaging and labelling; Intertape Polymer Group Inc., a leader in the development and production of films and tapes; and Stella-Jones Inc., a leading manufacturer of pressure-treated wood for products such as railway ties and utility poles.
IT was also well represented by firms including Open Text Corp., which provides enterprise information management solutions; Constellation Software Inc., which is engaged in the acquisition and growth of software companies; and CGI Group Inc., a leading provider of IT and business consulting services.
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 L.P. Both used under licence by Richardson GMP Ltd.