What are we looking for?
Strength in the metals and mining sector.
In a challenging time for global markets so far this year, some companies in the metals and mining space have bucked the trend recently with a considerable rebound.
Since the end of January, the S&P/TSX capped diversified metals and mining index has risen 26.2 per cent while the S&P/TSX composite index has been flat.
We decided to dig into the sector to look for potential companies with fundamental strength at reasonable valuations. My colleague Lawrence Ullman and I used Bloomberg to rank Canadian and U.S. firms with market capitalizations above $250-million and the best mix of:
- EBITDA yield (latest 12-month earnings before interest, taxes, depreciation and amortization as a percentage of total enterprise value);
- Free cash flow yield (latest 12-month FCF as a percentage of latest price);
- Return on invested capital;
- Three-month consensus earnings estimate revision.
Qualifying stocks must have: a three-month consensus earnings estimate revision no worse than minus-15 per cent; a free cash flow yield greater than 2 per cent; and a positive earnings surprise for the most recently reported quarter.
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
We used Bloomberg to perform a back-test starting Jan. 31, 2007, selecting an equally weighted portfolio of up to the best 10 companies (currently only nine companies meet the criteria). The portfolio would be reselected and rebalanced quarterly.
Over the nine-year period, this strategy would have generated an annualized total return, in Canadian dollars, of 2.1 per cent compared with minus 7.9 per cent per cent for the S&P/TSX capped diversified metals and mining index. The strategy would have experienced substantial swings but actually experienced considerably less volatility than the index, as measured by a beta of 0.53 (this suggests that for each gain or loss of 1 per cent for the index, the strategy would only experience a change of 0.53 per cent).
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 LP. Both used under licence by Richardson GMP Ltd.