What are we looking for?
Companies that are well-positioned for a market rebound in the future.
As inflation has shown its first signs of peaking, possibly signalling the beginning of the end of global monetary policy tightening, savvy investors are on the lookout for those companies that can weather the rest of the storm as well as rebound when the economy eventually recovers.
Optionality during turbulent times allows companies to remain passive as the economy declines, while maintaining the flexibility to invest aggressively in the future following a rebound. These investments can include acquisitions of companies trading at a discount, share buyback programs or increased hiring to pivot back to a sales-growth mindset.
To begin our analysis, we began by using FactSet’s Universal Screening tool to pull every security listed on a Canadian exchange. We further narrowed down our list using the parameters below:
- Market capitalization greater than $1-billion;
- Cash and short-term investments greater than 5 per cent of market cap – providing potential growth options for when the economy recovers;
- Short-term debt less than 10 per cent of total debt – indicating that there are no large debt repayments due in the next 12 months;
- Interest rate coverage ratio (earnings before interest and taxes divided by the company’s interest expense) greater than three;
- Free cash flow yield greater than 5 per cent.
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What we found
Our screen uncovered 12 companies, which we have ranked by year-to-date total return.
Interestingly, despite having no screening parameters around total returns, the average year-to-date total return of our 12 companies is 9.5 per cent, considerably outperforming the broader Canadian market, which has fallen around 3.4 per cent, assuming dividends are reinvested. The returns are skewed upward by the two oil and gas companies topping our screen, Cenovus Energy Inc. and Imperial Oil Ltd. – ranking first and second, respectively. The considerable returns make sense given that the Canadian energy sector continues to benefit from elevated oil prices.
Imperial Oil has generated a 67.6 per cent year-to-date total return. While Imperial carries a total debt load of $4.4-billion, only 4.9 per cent of which is short-term debt, it also holds $3.6-billion in cash and short-term investments, or 7.9 per cent of its market cap – providing swaths of excess liquidity. This is further supported by the fact that Imperial recently announced a substantial issuer bid of up to $1.5-billion, which is a means for the company to distribute excess cash to shareholders by repurchasing its own shares.
Stelco Holdings Inc. ranked at No. 5 on our screen with a year-to-date total return of 13 per cent. The steel producer’s stock price has shown resiliency despite sharply lower steel prices, which have fallen 54 per cent year-to-date. It continues to hold substantial optionality through its cash and short-term investments equivalent to 48.7 per cent of its market cap, far beyond the screen average of 15.8 per cent. This, in addition to Stelco’s limited debt obligations and high free cash flow yield, may account for its relative outperformance versus lower steel prices. Stelco is starting to put that cash to use, as it reported earnings on Nov. 15 and declared a special dividend of $3 a share and hiked its quarterly dividend by 40 per cent.
The information in this article is not investment advice. FactSet assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained above.
Arjun Deiva, CFA, is regional director of FactSet Canada’s consulting division.