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What are we looking for?

Strength from the Canadian industrials sector.

The screen

Last week's U.S. election was a pretty significant shock to the system and was followed by a flurry of mixed activity as investors reviewed their portfolios for potential strategic repositioning. In Canada, the S&P/TSX composite industrials index has been a leader posting a return of 2 per cent in the three days following the Trump victory.

Its counterpart south of the border, the S&P 500 industrials index, has surged with a return of 4.8 per cent. Many are expecting the sector to continue as a relative outperformer as companies focused on manufacturing, engineering, construction, aerospace and defence could benefit from private and public spending.

In order to search for potential investment ideas, Lawrence Ullman and I turned to Morningstar CPMS to rank firms from the industrials sector with the best mix of:

  • Return on capital;
  • Price relative to its 200-day moving average;
  • Three-month consensus earnings estimate revision;
  • Standard deviation of daily total returns over 90 days (a lower figure, signalling stocks with less volatility, is favoured for this screen);
  • Enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA).

We limited results to companies with market capitalization above $500-million.

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 CPMS to perform a back-test starting Oct. 31, 2006, initially selecting an equally weighted portfolio of the top 10 qualifying stocks and each month replacing those that are no longer in the top 40 per cent of the rankings.

Over the full period, this strategy would have generated an annualized total return of 10 per cent compared with 5.2 per cent for the S&P/TSX composite total return index.

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.

Select TSX-listed industrial stocks

RankCompanyTickerMarket Cap ($Mil)Return on Capital (%)% Change from 200D Avg.3M EPS Revision (%)90D Std. dev. of Daily Rtns.*EV/EBITDADiv. Yield (%)
1Air CanadaAC-T3,530.024.637.610.1C+3.30.0
2TransForce Inc.TFI-T2,898.311.829.210.5C+9.62.4
3Chorus Aviation Inc.CHR-T751.724.00.61.6A+5.87.8
4Ag Growth InternationalAFN-T770.810.834.78.3B-14.44.6
5Aimia Inc.AIM-T1,149.820.6-8.19.1B-7.310.6
6Exchange Income Corp.EIF-T1,149.012.328.3-0.8B-8.95.2
7CAE Inc.CAE-T5,152.011.916.01.0A-10.41.7
8Cdn National RailwayCNR-T65,886.
9Badger Daylighting Ltd.BAD-T1,
10Magellan Aerospace Corp.MAL-T1,085.616.210.9-1.5B+7.61.2

Source: Morningstar CPMS

* Grades relative to 719 companies in the CPMS Canadian database; A = good, E = poor.