Michael Cloherty is senior account manager for StockPointer at Inovestor Inc.
What are we looking for?
Canadian companies with high economic value – companies creating the highest economic profit for their shareholders – that are trading below their intrinsic value.
The screen
We searched for the top 20 Canadian stocks in StockPointer with a minimum market cap of $750-million and looked at the following metrics:
-highest economic performance index, or EPI, (return on capital divided by cost of capital) to find those companies that create the highest economic profit for investors. We want a ratio higher than 1.0 because it reflects wealth creation for shareholders.
-A price vs. intrinsic value ratio of less than 1.0 to ensure that the stock trading at a discount relative to its intrinsic value.
-Future growth value divided by market value (FGV/MV) – a ratio that helps determine whether the stock is trading at a discount or premium to its growth. A negative FGV/MV indicates the current market value is lower than the current value of the operations of the company.
-A market value-added (MVA/MV) ratio that is positive to ensure the invested capital is working properly. (MVA is the total market value minus the capital that was invested in the company.) We evaluate the difference between the market value of the company and the capital that was invested in it.
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 (stockpointer.ca) also allows investors to create personalized filters and build custom portfolios.
What did we find?
There's no shortage of companies that are able to generate a return on capital much higher than their cost of capital. Currently, just over half of the companies in this top 20 list are priced at a discount to both their intrinsic value and their future growth value. Most of these companies are coming from the consumer staples and telecommunications sectors, potentially reflecting sector headwinds that they are expecting to face in the coming quarters.
A lot of the companies in the filter results are not common household names, but are good wealth creators for their shareholders. A good example is the top four companies: Gluskin Sheff + Associates Inc., First National, Constellation Software and Evertz Technologies.
Investors are advised to do additional research prior to investing in any of the companies mentioned.