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What are we looking for?

Market pullbacks, such as the one we’ve seen this week, can give investors a rare opportunity to enter the market or add to existing positions on a discount. Financial stocks, which make up the largest component of the S&P/TSX (32.1 per cent), remain under pressure despite strong earnings reports by many of the major banks. No one knows the short-term direction of stocks, but financials have been strong long-term performers. Now may be an opportunity to find great financial companies trading significantly off their recent highs.

The screen

We will be using Trading Central Strategy Builder to search for Canadian financial stocks trading significantly lower as a result of the pullback that is occurring in the S&P/TSX.

We begin by setting a minimum market-capitalization threshold of $1-billion to focus on larger, more established companies in the market.

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Next, we will look for companies with stock prices down at least 5 per cent from their 52-week highs.

Finally, we will employ some value investing criteria to identify stocks that would be of interest to bargain-hunting investors. Specifically, we will look for companies with price-to-earnings ratios of less than 15 compared with the S&P/TSX average of 17 and a five-year average dividend growth rate of at least 5 per cent.

We have also included year-to-date and one-year price performance for your reference.

More about Trading Central

Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Trading Central’s product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities. Strategy Builder is available through leading retail brokers in Canada and worldwide.

What we found

Topping our list is Sun Life Financial Inc., which is one of Canada’s big three life-insurance companies along with Great-West Lifeco Inc. (ranked at No. 7 on our list) and Manulife Financial Corp. Sun Life provides insurance, retirement and wealth-management services to individual and corporate customers in Canada, the United States and Asia. It has the second-highest dividend growth rate on our list at 7.9 per cent and has declined approximately 9 per cent from its 52-week high. However, it remains the only company on our list with a positive year-to-date performance (3.1 per cent). The stock is up 20.7 per cent over the past 12 months.

Power Corp. of Canada, which has a controlling interest in Great-West Lifeco, has declined the most from its 52-week high on our list (13 per cent) and trades near its 200-day moving average. This technical analysis indicator is closely watched by traders because it can act as support on a decline, and signal a potential rebound to the upside.

Toronto-Dominion Bank has the highest dividend growth rate on our list at 9.4 per cent with a dividend yield of 4.5 per cent. The company announced an increase in its quarterly dividend by 5 cents a share as it released first-quarter earnings on Thursday. TD was one of the only banks to disappoint analysts regarding their earnings. TD is down more than 10 per cent since posting its 52-week high back in September. The recent pullback may be just what some investors have been waiting for.

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Trading Central Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 4.3-per-cent annualized return compared with 3.6 per cent for the S&P/TSX.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

Select TSX-listed financial stocks

RankCompanySymbolMkt.Cap. ($ Bil.) 5Y Div. Growth Rate (%)P/E% Chg. from 52W HighYTD Performance (%)1Y Performance (%)Div. Yld. (%)Recent Price ($)
1Sun Life Financial Inc.SLF-T36.47.914.0-9.33.120.73.660.80
2National Bank of CanadaNA-T24.46.810.9-5.6-1.114.04.070.85
3CIBCCM-T47.77.311.2-9.8-2.0-6.75.5105.29
4Royal Bank of CanadaRY-T148.07.310.5-7.7-1.1-1.04.3102.90
5Toronto-Dominion BankTD-T133.09.410.5-10.1-3.3-8.14.570.66
6Bank of Nova ScotiaBNS-T88.06.410.0-8.1-3.1-2.85.171.38
7Great-West Lifeco Inc.GWO-T30.36.113.1-11.2-4.14.75.531.99
8Power Corp. of CanadaPOW-T21.86.310.5-13.0-7.710.75.330.79
9Bank of MontrealBMO-T59.45.710.1-11.9-6.7-5.04.593.88

Source: Trading Central 

Gary Christie is head of North American research at Trading Central in Ottawa.

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