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number cruncher

What are we looking for?

Canadian value-focused stocks.

The screen

Today I’m going to select a portfolio of Canadian value stocks based on how they compare with their industry peers. Recall that “industry” refers to the Morningstar sector in which a stock is located, and a stock’s peers refer to the median value of the other companies in the same sector. My criteria:

  • Industry relative trailing price to earnings (P/E) ratio – compares a company’s trailing P/E with its industry’s peers, lower values preferred. For example, a value of 0.2 for the industry relative P/E ratio would imply the company’s P/E is 0.2 times (one-fifth) of the industry median P/E;
  • Industry relative price to book (P/B) ratio – compares a company’s P/B with that of its industry peers, lower values preferred;
  • Industry relative price to sales (P/S) ratio – compares a company’s P/S ratio with that of the industry to which the company belongs, lower values preferred;
  • Industry relative debt to cash flow ratio – compares a company’s long-term debt divided by its trailing four quarters of cash flow relative to the same metric for its industry peers, lower values preferred. Note that in this case, industry relative looks at the difference between the two values – i.e., an industry relative EPS payout ratio of minus 19.4 per cent shows that a stock’s payout ratio is 19.4 per cent lower than that of its sector.

In order to qualify, stocks must have an industry relative earnings per share payout ratio (amount of dividends a company is expected to pay out in the next 12 months as a percentage of estimated EPS, compared with the same value for the company’s industry) in the top two thirds of peers – today this value is 1.77 times or below. Stocks must also have a market cap in the top two thirds of peers – today this value is $160.7-million or higher.

More about Morningstar

Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.

What we found

I used Morningstar CPMS to back-test this strategy from December, 1991, to October, 2019. During this process, a maximum of 15 stocks were purchased. Stocks were sold if their industry relative EPS payout ratio fell into the bottom third of peers. When sold, the positions were replaced with the highest-ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 14 per cent while the S&P/TSX Composite Index returned 8.3 per cent, on a total return basis, across the same period.

Stocks that qualify for purchase into the strategy today are listed in the accompanying table. As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Select TSX-listed stocks outperforming their industry peers

RankCompanySymbolMorningstar SectorMkt. Cap. ($ Mil.)Ind. Rel. Trail. P/EInd. Rel. P/BInd. Rel. P/SInd. Rel. Debt/CFInd. Rel. EPS Payout RatioDiv. Yld. (%)Recent Price ($)Trailing 12M Price Chg. (%)
1Celestica Inc.CLS-TTechnology1,
2Largo Resources Ltd.LGO-TBasic Materials659.
3Argonaut Gold Inc.AR-TBasic Materials297.
4Centerra Gold Inc.CG-TBasic Materials3,
5Gran Colombia GoldGCM-TBasic Materials252.
6Semafo Inc.SMF-TBasic Materials1,
7Bausch Health Comp.BHC-THealth care12,
8OrganiGram HoldingsOGI-THealth care751.
9Dorel Industries Inc.DII-B-TCons. Cyclical166.
10CRH Medical Corp.CRH-THealth care293.
11Viemed HealthcareVMD-THealth care356.
12Equitable Group Inc.EQB-TFinancial Serv.1,897.
13Martinrea Int'l Inc.MRE-TCons. Cyclical948.
14Linamar Corp.LNR-TCons. Cyclical3,
15Hardwoods Dist. Inc.HDI-TIndustrials276.

Source: Morningstar CPMS

Emily Halverson-Duncan, CFA, is a director, CPMS sales at Morningstar Research Inc.

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