What are we looking for?
Canadian companies with strong growth prospects and low correlation to the S&P/TSX Composite Index.
We focused on large Canadian stocks within the S&P/TSX index that offer strong growth potential while being relatively uncorrelated to our stock market. The filters were created using Eikon's Screener application. Here are the metrics chosen:
- A market cap over $1-billion in order to include companies that are already past the early growth stages and established in the market.
- The price/earnings ratio, which indicates the relation between the current stock price and the past 12 months’ earnings. We set the minimum for the multiple at 10.
- The GICS (Global Industry Classification Standard) Sector Name, which allows us to identify top-performing industries.
- The Smart Estimate one-year earnings per share, which gives us a measure of profitability at the end of the first quarter of 2019. We set the minimum at 10 per cent.
- The cash flow margin for the past 12 months, which measures the ability of the firm to convert revenues to cash flow effectively. The benchmark used is 10 per cent.
- The total debt-to-equity ratio according to the most recent annual report, which will determine if the company has the tendency to choose debt or equity markets to access needed funds.
- The return-on-equity ratio, which allows us to see how the company is generating earnings from the common shareholders’ capital. A high mark of 20 per cent was used as the minimum criterion and data from the past 12 months were used.
All of the filters above were included and then ranked by the beta measure, which shows how the stock price moves in relation to the S&P/TSX index's fluctuations for the past five years. The lower beta, the better the rank.
More about the Eikon Screener
The Screener is an application available with most Thomson Reuters Eikon variants. It allows an investor to filter a particular universe of stocks with hundreds of possible criteria. One may then rank the results according to one or several different factors, and weigh their influence on the ranking accordingly. The Screener is a quick way to see the top performers in the universe, which can reflect the investor's allocation strategy. It is also very easy to create templates so that one can see the ranking changes over time by reopening the Screener periodically.
What we found
Our filter generated 12 results. Half of the results were companies in the consumer discretionary sector. This is not surprising given that these companies produce goods that are deemed more essential to everyday life and so the beta measure will be lower. Large stock market movements will have a smaller effect on the stock price of those firms than the average TSX company. What constitutes the element of surprise could be that they still performed very well, even under high-profitability criteria. All of our filters are based on the past 12 months' data, except the earnings per share estimate, which is forward-looking. Of course, history may not repeat itself, but the strong earnings per share expectations in a year may reassure some investors.
The P/E ratio is critical in our analysis because it helps identify stocks that are trading at a premium or at a discount relative to their peers. For example, Quebecor Inc. and Canadian Pacific Railway Ltd. are relatively cheaper than their industry peers. Altus Group Ltd. proves to be the winner in that category.
One concern with Quebecor Inc. would be that they have 13.6-times more debt than equity in their financing structure. Debt is less costly than equity, but may become a problem if there is a lack of discipline in the repayments. Of course, this ratio is highly dependent on the industry, since companies will usually try to adopt financing strategies similar to the leaders.
The ability to transfer revenues to cash flow quickly is essential to any business. The famous quote "cash is king" will never lose its relevance for any business model. Again, this criterion is industry specific, but many investors choose to favour cash flows over earnings, for example. CP Rail and Canadian National Railway Co. dominate the list. This is not surprising since large amounts of cash need to be disbursed to maintain and expand their railway systems throughout North America.
Finally, Dollarama Inc. remains a solid investment, although the high P/E ratio could discourage some. The firm is using its high leverage ratio effectively since the return on equity (ROE) for its investors has been tremendous over the past 12 months.
Guillaume Laframboise is a client specialist with Thomson Reuters.
Canadian stocks with strong growth prospects
|Ranking||Company||Ticker||GICS Sector Name||Market Cap ($Mil)||Beta rank||P/E||EPS 1Yr SmartEstimate Growth||CF Margin||Debt to Equity||ROE TTM|
|1||Canadian Pacific Railway Ltd.||CP-T||Industrials||33,442.2||12||11.45||10.6%||54.4%||126.8%||53.3%|
|2||Canadian National Railway Co.||CNR-T||Industrials||71,389.4||8||13.22||11.9%||51.8%||65.0%||34.8%|
|3||Northland Power Inc.||NPI-T||Utilities||3,910.1||6||26.15||16.8%||45.9%||781.5%||22.1%|
|4||Quebecor Inc.||QBR.B-T||Cons. Disc.||5,699.8||1||10.94||17.0%||29.8%||1,359.3%||79.9%|
|5||Altus Group Ltd.||AIF-T||Real Estate||1,202.7||10||10.86||22.4%||29.1%||36.8%||29.3%|
|6||Constellation Software Inc.||CSU-T||IT||18,721.4||4||65.70||15.2%||19.1%||55.1%||41.8%|
|7||Evertz Technologies Ltd.||ET-T||IT||1,279.3||3||19.46||16.8%||18.5%||0.3%||20.4%|
|8||Dollarama Inc.||DOL-T||Cons. Disc.||16,275.3||2||34.19||11.7%||17.8%||1,325.0%||543.3%|
|9||Intertape Polymer Group Inc.||ITP-T||Materials||1,279.5||7||13.66||13.4%||12.1%||112.6%||30.5%|
|10||Sleep Country Canada Holdings Inc.||ZZZ-T||Cons. Disc.||1,351.2||9||23.46||12.0%||11.9%||40.4%||22.8%|
|11||Spin Master Corp.||TOY-T||Cons. Disc.||1,598.4||11||28.00||11.6%||11.9%||0.1%||39.0%|
|12||Aritzia Inc.||ATZ-T||Cons. Disc.||1,431.9||5||27.89||19.6%||10.2%||67.2%||23.7%|
Source: Thomson Reuters Eikon