What are we looking for?
Profitable companies in the country's most promising sector.
The screen
A month ago, we performed a top-down screen on the Canadian equity market and identified financials as the most attractively valued sector – based on forward price-to-earnings (P/E) ratios. Within the financials sector Dream Global REIT, CIBC and Gluskin Sheff were highlighted, and over the past month these have returned approximately 0, 5, and 12 per cent respectively. Today we will revisit the Canadian market and this time use the Thomson Reuters Starmine intrinsic valuation model to identify the sector of the economy with the best value. Even with this modified approach financials still look the best, with an aggregate percentile score of 79.
- Our universe for the screen will be companies in the Thomson Reuters Business Classification (TRBC) financials economic sector that are headquartered in Canada.
- The first metric we will use for the screen is the Thomson Reuters Starmine intrinsic valuation model mentioned previously. Each company receives a percentile score, relative to the rest of the country and we require a score of at least 85.
- Next, to ensure that beyond selecting companies with cheap valuations we are also selecting companies that should be highly profitable, we consider the SmartEstimate projected earnings per share (EPS) yield. For this metric we require a projection of at least 10 per cent.
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What did we find?
The screen yields nine companies, and just as in last month's screen, CIBC is the only one of the Big 5 banks to pass.
Also passing the screen are Fairfax India Holdings, as well as its parent company Fairfax Financial Holdings. Fairfax Financial is engaged primarily in property and casualty insurance, reinsurance., and investment management worldwide. It has identified markets such as Singapore and India as priorities for growth. It also has non-financial holdings in developed markets too, for example, Canada's Sporting Life.
Fairfax India Holdings invests in businesses – both public and private – that benefit from India's growing middle class and the pro-business political environment supported by Prime Minister Narendra Modi. This summer the company announced the acquisition of a further 10 per cent of Bangalore International Airport, bringing its total stake to 48 per cent. RBC Capital Markets and Cormark have Fairfax India rated as "outperform" and "buy" respectively, both with a price target more than 12 per cent above its current level.
Hugh Smith, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.