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What are we looking for?

As a follow-up to this column two weeks ago where we looked for companies on the S&P/TSX composite index generating the highest economic profit and value for investors, this time we are going to look for similar Canadian companies, but which are not part of the benchmark index.

The screen

We searched Canadian-listed companies with a minimum market cap of $100-million that are not included on the S&P/TSX composite for the top 20 by looking at the following metrics.

– Economic performance index. The EPI, (return on capital divided by the cost of capital) must be greater than 1.0. EPI helps find companies that create the highest economic profit and wealth creation for investors.

– Return on capital measures management's success at effectively using shareholders' invested money. We calculate return on capital by dividing net operating profit after taxes by capital.

– Five-year-average return on capital. We want to compare this with where the company currently stands.

– Performance spread. It is the difference between the return on capital and the cost of capital. It's important to evaluate how much higher the return on capital is versus the cost of capital.

More about StockPointer

StockPointer is a fundamental analysis tool based on an EVA (economic value added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 6,500 companies (Canadian and U.S. stocks and American depositary receipts), StockPointer ( also allows investors to create personalized filters and build custom portfolios.

What did we find?

The majority of the companies in the list come from the consumer discretionary, financial and information technology sectors. The sectors lacking representation were consumer staples, telecom and utilities. The two companies with the highest return on capital by a long shot – Cipher Pharmaceuticals and Gluskin Sheff Associates – are also the two companies with an EPI above 11.0.

Fourteen of the 20 companies seem to be in a stronger position today, with their current return on capital above their five year average. We also had seven companies with an EPI above 4.0 – meaning their return on capital was at least four times higher than their cost of capital. Three companies in this portion – Cipher, Counsel Corp., and Newfoundland Capital Corp. – all have a market cap less than $500-million.

There are a lot of uncommon names in the results with high economic performance that are smaller in size, and have lower volume. The majority of the stocks have no more than about 60,000 shares traded daily, which big institutional investors may be forced to stay away from, but which could present an interesting opportunity for individual investors.

Investors are advised to do additional research prior to investing in any of the companies mentioned.

Michael Cloherty is senior account manager for StockPointer at Inovestor Inc.

Canadian value generators outside the S&P/TSX composite