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Number Cruncher Looking for portfolio safety and value in 2019? Start with the past year’s dogs

What are we looking for?

Some believe the top performing equities of 2019 could be the “dogs” of 2018. It’s a play on an investment theory that the worst performing equities in the prior year tend to get oversold and have the potential to bounce and perform well the following year – almost as if there was an overreaction, with a new year bringing a fresh start.

With the year still relatively new, my associate Allan Meyer and I thought we would take a closer look at “dogs” over the past 52 weeks using our investment philosophy focused on safety and value.

The screen

We started with TSX-listed equities with a market capitalization of $1-billion or more. We view this as a safety factor; larger companies usually have more stable and diverse revenue streams and tend to be more liquid.

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To identify our “dogs,” we looked at companies with 52-week total returns of negative 30 per cent or worse. The list is sorted on this metric from worst to, well, least worst.

Allan and I love dividends and as we like to tell clients, “We like to get paid while we wait for capital appreciation.” Dividends generally reflect safer and more stable earnings profiles. Our list is limited to dividend payers. Dividend yield is the annual dividend divided by the share price.

The debt-to-equity ratio is a safety measure, a lower number is better. The debt-to-equity ratio is debt outstanding divided by shareholders' equity. It is a safety measure – a smaller number indicates lower leverage or debt levels.

Allan and I are value investors – we’re always hunting for a deal. Price-to-earnings is the share price divided by the projected earnings for each share. It is a valuation metric – the lower the number, the better the value.

All companies on the list generate earnings. Earnings momentum is the change in annualized earnings over the last quarter. A positive number means earnings are growing, while the opposite is true for a negative number. Earnings increases should translate into price appreciation and maybe even dividend bumps over time, and vice versa for earnings decreases.

What we found

Encana Corp., CI Financial Corp., Linamar Corp., NFI Group Inc., Martinrea International Inc. and Canadian Western Bank all score well for safety and value. Auto-parts makers Linamar and Martinrea look like value plays as they are the most inexpensive (lowest P/E ratios) among the group.

The list produces a high concentration of names in the energy sector, some of which score very well on earnings momentum. Exchange-traded funds are an option for investors looking to play the energy sector but prefer to diversify away individual security risk. BMO Equal Weight Oil & Gas Index ETF (ZEO) and iShares S&P/TSX Capped Energy Index ETF (XEG) offer energy related ETFs.

Dogs of the TSX (past 52 weeks)

Company Ticker Market Cap ($Bil) Recent Price ($) 52wk Total Return (%) Div. Yield (%) D/E (%) P/E Earns Momentum (%)
Crescent Point Energy Corp. CPG-T 2.5 4.61 -54.6 0.9 44.9 7.0 1.9
Corus Entertainment Inc. CJR-B-T 1.2 5.68 -53.4 4.2 130.7 6.5 -4.4
Encana Corp. ECA-T 8.8 9.20 -52.7 0.9 87.9 7.5 30.1
Peyto Exploration & Develop. Corp. PEY-T 1.2 7.08 -49.5 3.4 74.6 13.1 -8.6
Whitecap Resources Inc. WCP-T 1.9 4.52 -49.2 7.2 38.5 11.9 53.3
AltaGas Ltd. ALA-T 3.8 13.96 -46.8 6.9 80.3 13.7 -29.9
ARC Resources Ltd. ARX-T 3.4 9.67 -42.4 6.2 24.8 19.7 -2.6
Hudbay Minerals Inc. HBM-T 2.0 7.47 -41.8 0.3 50.4 17.3 -16.2
Alamos Gold Inc. AGI-T 2.1 5.39 -39.8 0.5 0.3 28.8 -42.9
Torc Oil & Gas Ltd. TOG-T 1.0 4.71 -39.6 5.6 16.2 14.8 100.0
CI Financial Corp. CIX-T 4.4 17.95 -38.9 4.0 58.8 7.6 3.0
Shawcor Ltd. SCL-T 1.3 18.71 -38.0 3.2 24.8 30.7 -17.7
Dollarama Inc. DOL-T 11.1 35.00 -37.8 0.5 0.0 18.6 1.7
Linamar Corp. LNR-T 3.2 48.81 -37.6 1.0 41.9 5.0 1.0
First Quantum Minerals Ltd. FM-T 8.9 12.86 -37.3 0.1 76.7 10.3 134.5
NFI Group Inc. NFI-T 1.8 28.94 -34.9 5.2 78.8 7.8 2.0
Richelieu Hardware Ltd. RCH-T 1.5 25.45 -33.3 0.9 1.0 18.6 0.8
Vermilion Energy Inc. VET-T 5.0 33.01 -32.6 8.4 83.4 25.4 44.0
Canadian Western Bank CWB-T 2.6 29.00 -31.5 3.6 82.4 9.0 3.5
Martinrea International Inc. MRE-T 1.0 11.86 -31.4 1.5 68.2 4.8 0.5

Source: Eikon, Wickham Investment Counsel Inc.

Investors should contact an investment professional or conduct further research before buying any of the securities listed here.

Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.

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