What are we looking for?
Some believe the best-performing equities of 2017 could be the worst performers of 2016. My associate Allan Meyer and I thought we would take a closer look at last year's "dogs" – and the possibility of rebound potential – using our investment philosophy focused on safety and value.
The screen
We started with TSX-listed equities with a market capitalization of $1-billion or more. We view market capitalization as a safety factor: Larger companies usually have more stable and diverse revenue streams and tend to be more liquid.
To identify our "dogs," we looked at the 2016 total return including dividends. All companies have a negative total return of 5 per cent or greater, and the list is sorted from worst to least-worst performers. While it is not mandatory that the companies pay dividends, Allan and I love them, and as we like to tell clients, "We like to get paid while we wait for capital appreciation." Dividends generally reflect safer and more stable earnings profiles and could be used to identify companies that are more likely to turn around in 2017.
Dividend yield is based on the current share price divided by the projected annual dividend payments. Allan and I are value hunters, we're always looking for a deal.
The price-to-earnings ratio is the share price divided by the projected earnings per share. It is a valuation metric – the lower the number, the better the value.
Earnings momentum is the change in annualized earnings over the past quarter. A positive number means earnings are growing, a proxy for capital appreciation. The opposite is true for a negative number.
Lastly, we looked at debt to equity. A smaller ratio indicates lower levels of debt and can be viewed as a sign of safety. A number below 100 implies a company has enough equity to pay its debt obligations, while high debt levels and decreasing or negative earnings could be a warning sign.
What did we find?
Linamar Corp. and West Fraser Timber Co. Ltd. look interesting because of their attractive valuations, positive earnings momentum and relatively low debt levels. High debt levels and negative earnings momentum on Valeant Pharmaceuticals International Inc. and Hudson's Bay Co. should be noted.
Investors should contact an investment professional or conduct further research before buying any of the securities listed here.
Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.