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What are we looking for?

Canadian resource stocks poised to benefit from the continuing rally in commodity prices.

After several years of lacklustre performance, commodity prices saw a significant rebound in 2017, especially toward the end of the year. The forest product sub-index was up approximately 30 per cent for the year, while West Texas intermediate (WTI) crude oil hit a 2 1/2-year high. Gold was up 12 per cent on the year while copper prices in December saw their best run in 30 years. Commodity prices look to continue their advance in 2018 on the back of strong global economic growth, thereby pulling many Canadian resource stocks higher.

The screen

We will be using Recognia Strategy Builder to search for Canadian resource stocks that may be poised to appreciate in 2018.

We begin by setting a minimum market cap threshold of $1-billion. This will focus our search on mid- and large-cap Canadian resource stocks in the metals and minerals, forest products and precious metals industries.

Next, we will look for stocks that currently trade at reasonable valuations. We will filter based on a forward price-to-earnings ratio of 25 or less. We also want to focus on companies with profitable operations. We will select only companies with operating margins of 10 per cent or more. Operating margin is an indication of how efficiently the company is able to convert revenue to profits in its core business.

Finally, we wish to focus on companies with improving earnings by selecting stocks with quarterly earnings growth of at least 10 per cent compared to the same quarter a year ago.

More about Recognia

Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.

What did we find?

Topping our list is mining giant Teck Resources Ltd. Teck is part of the precious metals industry due to the company's significant gold and silver mining operations. However, Teck also has significant copper, zinc and coal production. The stock hit a 52-week low in June, 2017, but has rallied strongly since, finishing the year up over 60 per cent from its low. In spite of this rally, the forward P/E ratio is still a very reasonable 7.8.

Canadian forest products companies have done very well in the past year despite U.S. tariffs imposed on some products. Norbord Inc. is a Toronto-based provider of oriented strand board used in the construction industry. Up 30 per cent in the past year, Norbord has a low forward P/E ratio of 8.6 and strong operating margins at 22.8 per cent.

HudBay Minerals Inc. is a producer of base metals such as copper and zinc from their operations in Canada, the United States and South America. Since hitting a 52-week low in June, 2017, the stock has rallied strongly (up over 90 per cent) and has demonstrated good operating margins and earnings growth over the past year.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.

Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.

Select strong Canadian resource stocks

RankNameTickerMarket Cap. ($B)IndustryRecent PriceForward P/E RatioOperating MarginEPS Growth Rate (Last Q vs. Prior Yr)1-Yr Price PerformanceDiv. Yield
1Teck Resources Ltd.TECK.B-T$19.5Precious Metals$33.377.835.4%155.0%21.5%0.7%
2Norbord Inc.OSB-T$3.7Forest Products$43.698.622.8%125.2%30.0%4.2%
3Labrador Iron Ore Royalty Corp.LIF-T$1.8Steel$27.0011.574.4%107.3%45.6%4.8%
4Kirkland Lake Gold Ltd.KL-T$4.2Precious Metals$20.1123.625.5%139.7%171.8%0.2%
5West Fraser Timber Co.WFT-T$6.2Forest Products$80.7213.614.4%13.8%68.3%0.4%
6Canfor Corp.CFP-T$3.3Forest Products$25.6415.310.7%34.2%68.0%0.0%
7Hudbay Minerals Inc.HBM-T$3.0Metals/Minerals$11.4620.820.4%16.7%34.0%0.2%

Source: Recognia