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What are we looking for?

Before Monday’s sell-off, the S&P/TSX Composite Index generated a return of 6 per cent over the past year, but a chunk of this performance is attributable to the energy sector, which doubled in the same time frame, camouflaging the sluggish performance registered by many non-energy companies.

We will look for companies with positive free cash flow and a declining stock price over the past year to find some that are trading at an attractive price.

The screen

We screened Canadian stocks focusing on the following criteria:

  • Market capitalization higher than $5-billion;
  • Negative one-year price return – we look for stocks with a lack of positive momentum;
  • Relative Economic Performance Index higher than 0.8 – relative EPI is a multistep calculation that compares the profitability of a company to its valuation and cost of capital. Higher profitability, a lower valuation and a lower cost of capital increase the ratio. Ninety-five per cent of the time the ratio falls between zero and two and is not meaningful below zero, which implies a negative return on capital. A ratio of 0.8 indicates economic performance in the top 20 per cent of the Canadian universe;
  • Positive five-year average free-cash-flow-to-capital – we want companies that generates excess cash flow that they can redistribute to shareholders or pay off debt.

For informational purposes, we have also included the most recent trailing 12 months’ return on capital, price-to-earnings, price-to-book, dividend yield and one-year price return. Please note that some ratios may be as of the 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

Profitability, declining price make these 15 TSX stocks look attractively valued

CompanyTickerMkt Cap. ($ Mil.)Rel. EPIROC (%)5Y Avg. FCF/Cap.(%)P/EP/BDiv. Yld. (%)1Y Price Rtn. (%)Recent Price ($)
Onex Corp.ONEX-T6,457.52.1711.1n/a3.70.60.5-12.474.39
Quebecor Inc.QBR-B-T7,067.71.377.75.612.95.64.1-13.429.54
Canadian Tire Corp.CTC-A-T10,191.91.3611.96.79.22.03.1-15.0169.45
Manulife Fin'l Corp.MFC-T48,497.31.1714.9n/a7.11.05.3-3.424.96
Bausch Health Cos.BHC-T7,436.11.144.52.4n/c18.7n/a-42.920.69
Lundin Mining Corp.LUN-T8,124.81.0911.91.66.41.43.3-25.811.01
Great-West LifecoGWO-T31,613.21.0614.0n/a9.91.35.8-6.333.97
iA Financial Corp.IAG-T7,198.81.0013.6n/a8.71.13.7-5.566.93
B2Gold Corp.BTO-T5,863.70.9213.48.011.21.63.7-11.55.56
Open Text Corp.OTEX-T13,304.00.898.55.122.12.62.3-15.149.36
CCL Industries Inc.CCL-B-T9,957.00.8712.07.916.72.71.7-22.655.26
Parkland Corp.PKI-T5,405.40.859.36.343.82.7n/a-12.035.06
IGM Financial Inc.IGM-T8,968.80.8214.7n/a9.21.46.0-16.537.42
Sun Life FinancialSLF-T37,316.50.8113.7n/a9.51.64.2-3.863.68
Cdn. Apt. Prop. REITCAR-UN-T8,288.60.816.03.55.90.83.1-17.247.34

Source: Inovestor

Note: Free cash flow is not calculated for financial corporations owing to their structure, so free-cash-flow-to-capital is not available.

Onex Corp., an investment manager involved in credit strategies and private equity, stands out of the list with a relative EPI of 2.17. The nature of its profits is volatile since most of it comes from changes in the fair value of their investments. While the company will record losses from time to time, especially in a stressed environment, investors looking for value may take comfort in its P/E of 3.7 and price-to-book of only 0.6. The company’s stock has fallen more than 25 per cent year-to-date. The company is slated to report its first-quarter earnings on Friday.

Quebecor Inc. has been invited by Rogers Communications Inc. to participate in negotiations to acquire Freedom Mobile from Shaw Communications Inc., according to a Globe and Mail report. The Competition Bureau is seeking to block Rogers’s takeover of Shaw. The acquisition of Shaw’s Freedom would allow Quebecor to follow an earlier expansion plan outside Quebec and could put it in a better position to compete with its telecom rivals. The company will release its first quarter results on Thursday.

Manulife Financial Corp. has a return on capital of 14.9 per cent, the highest of our list, and a juicy dividend of 5.3. The life insurance industry has seen some tough times in the past decade with historically low long-term interest rates, but that could be about to change with the Canadian 10-year bond hitting 3.11 per cent, the highest level since 2011. The company will release its first-quarter results on Wednesday.

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.

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