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What are we looking for?

Companies less risky than the market.

Investors are reluctant to add to equities given the possibility of further interest rate hikes and the risk of a recession. According to many research papers, it is impossible to time the market. We think investors are more likely to miss a potential rebound if they try waiting to jump back into the market at the perfect time.

As a half measure, investors could invest progressively in lower-risk stocks that would offer some protection in case of a market meltdown.

The screen

We screened stocks from the S&P/TSX composite focusing on the following criteria:

  • Beta compared to the S&P/TSX composite lower than 0.9. (The beta is a measure of the volatility of the stock compared to the S&P/TSX composite.) A beta lower than one is considered less risky than the market;
  • StockPointer (SP) risk score lower than 30. The risk score is scaled from zero to 100, where 100 is a high-risk company and 30 is considered a low-risk one. The score takes into account many criteria; our software looks at leverage and stability of profitability, and uses an automatically calculated discounted cash flow to evaluate the expensiveness of the company;
  • Dividend yield higher than 4 per cent – a company that distributes a large portion of its profit to shareholders could be seen as less risky than one that needs to invest and innovate to perform.

For informational purposes, we have also included one-year dividend growth, three-month NOPAT (net operating profit after tax) growth, price/earnings and price/book ratios, and one-year price return. Please note that some ratios may be shown as of end of previous quarter.

More about Inovestor

Inovestor for Advisors is a fundamental-analysis research platform specializing in the economic value-added (EVA) approach. With Inovestor, advisers can quickly identify attractive investment opportunities, outsource their stock picking by using model portfolios, and easily communicate investment decisions with clients through client-friendly reports.

What we found

10 S&P/TSX Composite stocks with defensive attributes if the market melts down

NameTickerPriceMkt Value ($ MIL.)BetaSP Risk ScoreDiv. Yld. (%)1Y Div. Grth. (%)3M Nopat Grth. (%)P/EP/B1Y Price Rtn. (%)
Bank of Nova ScotiaBNS-T69.19824310.814.86.212.8-4.18.61.1-24.9
Toronto-Dominion BankTD-T88.841617510.715.54.112.720.79.41.7-12.7
Canadian Imperial Bank of CommerceCM-T58.5530030.915.65.312.0-3.98.71.1-28.5
Great-West Lifeco Inc.GWO-T34.06317380.817.66.611.93.310.71.3-11.8
North West Company Inc.NWC-T36.1417230.522.64.22.8-4.014.13.04.0
Sun Life Financial Inc.SLF-T64.72379320.923.04.922.7-12.111.91.4-10.2
Quebecor Inc. Class BQBR-B-T31.5873330.525.74.614.6-1.212.11.04.2
Telus CorporationT-T28.15399730.626.84.96.24.019.31.8-5.5
BCE Inc.BCE-T62.48569780.528.16.35.11.920.21.9-5.6
Atco Ltd. Class IACO-X-T43.4449480.529.24.33.02.912.81.15.2

Source: Invoster

Bank of Nova Scotia BNS-T has the lowest SP risk score and P/E of our screen at 14.8 and 8.6, respectively. The company underperforms other companies on the list on a three-month NOPAT basis with a decline of 4.1 per cent, the second-lowest on our list, leading to a one-year price performance of minus-24.9 per cent, the lowest of our list. However, the company has the third highest one-year dividend increase at 12.8 per cent, implying that the management could foresee a positive outlook despite the recent performance.

Toronto-Dominion TD-T is slightly more expensive than the Bank of Nova Scotia with a P/E of 9.4 and significantly more on a P/B basis, at 1.7 compared with 1.1 for the Bank of Nova Scotia. This higher valuation could be justified as it achieved favourable growth compared with the Bank of Nova Scotia with a three-month NOPAT growth of 20.7 per cent, the highest of our screen.

The North West Company NWC-T, a general merchandise retailer owning brands such as Northern and Giant Tiger and which operates primarily in Northern Canadian communities, has the third highest one-year price change at 4 per cent and has a beta of only 0.5, demonstrating its resilience and low-risk profile. The company sold 36 Giant Tiger stores during the summer of 2020 for $45-million and has only five stores left. Following the divestiture, the company reorganized its operations and it seems to have paid off with an 87.2-per-cent increase in profits in 2022 compared with 2020.

Investors are advised to do further research before investing in any of the companies listed in the accompanying table.

Anthony Ménard, CFA, is vice-president of data management at Inovestor.