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What are we looking for?

Undervalued Canadian equities with strong price momentum.

The screen

Equity markets in the United States have reached all-time highs over the past two weeks, with some investors and analysts questioning whether we are due for a pullback. Markets have historically performed well during the last five trading days of December and the first two trading days of January, a trend commonly known as the Santa Claus rally. Over the past 70 years, the S&P 500 has increased by an average of 1.3 per cent during this time frame.

Today, we search for Canadian-listed companies trading at a discount relative to their peers that have to potential to exceed the Santa Claus rally.

  • First, we screen for companies with a market capitalization greater than $1-billion.
  • Next, we use the StarMine Relative Valuation model to screen for companies with a score greater than or equal to 90. The relative valuation model is a percentile ranking of stocks based on price and enterprise value multiples such as price-to-earnings, price-to-cash-flow, price-to-book and enterprise value-to-EBITDA, with 100 representing the highest rank (EBITDA stands for earnings before interest, rakes, depreciation and amortization).
  • Finally, we use the StarMine Value Momentum model to screen for companies with a score greater than or equal to 90. The value momentum model is a percentile ranking of stocks based on recent valuation and momentum characteristics such as analysts estimates, historical stock returns and earnings-per-share growth rates.

More about Refinitiv

Refinitiv is one of the world’s largest providers of financial market data and infrastructure, serving more than 40,000 institutions worldwide. Refinitiv provides information, insights and technology that drive innovation and performance in global financial markets, enabling the financial community to trade smarter and faster, overcome regulatory challenges and scale intelligently.

What we found

The screen, ranked by the StarMine relative valuation model, produced six companies across three sectors – financials, energy and materials. Here are two companies from our list:

Seven Generations Energy Ltd., which ties for the highest ranked in relative valuation with a score of 100, is an energy producer focused on condensate and liquids-rich natural gas in Western Canada’s Montney region. Seven Generations delivered strong results in the third quarter and remains focused on “operational excellence” and maintaining a low-cost base for its current assets. While the stock is down more than 25 per cent year-to-date, analysts are expecting the company to improve its free cash flow margins because of stronger condensate prices and improved capital efficiencies. Of the 16 analysts covering the stock, 14 have a buy rating, with target prices ranging from $5.50 to $9.25 a share, with a mean target of $6.93.

Home Capital Group Inc. tied with Seven Generations for the top spot in relative valuation and ranked highest in value momentum with a score of 99. Home Capital offers residential and non-residential mortgage lending, consumer lending and credit card services. It has seen its loan growth grow 13 per cent since the third quarter of 2017, driven primarily by its “Alt-A” market, which comprises self-employed individuals, new Canadians and individuals with poor credit history. This segment represents 65 per cent of Home Capital’s portfolio, and many in this group have been disproportionately affected by COVID-19. However, the company’s provisions for credit losses are expected to normalize by the end of 2021. Since making executive leadership changes in late 2017, the stock has returned more than 110 per cent to investors.

Investors are advised to do their own research before trading in any of the securities shown.

Select TSX-listed companies trading at a discount relative to their peers 

CompanyTickerMkt. Cap. ($ Mil.)StarMine Rel. Valuation ModelStarMine Value Mom. Model1Y Ttl. Rtn. (%)Div. Yld. (%)Recent Close ($)
Seven Generations EnergyVII-T2,083.310095-17.2n/a6.42
Home Capital Group Inc.HCG-T1,545.510099-11.2n/a29.25
Canfor Corp.CFP-T2,830.0989845.8n/a22.53
ARC Resources Ltd.ARX-T2,174.59595-12.63.86.26
Canadian Western BankCWB-T2,542.49490-4.04.029.09
Tourmaline Oil Corp.TOU-T4,847.6909132.63.117.87

Source: Refinitiv 

Stephen Donovan, MBA, is a customer success leader, Refinitiv buy-side and commodities trading for the Americas.

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