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number cruncher

What are we looking for?

Defensive and fundamentally sound Canadian companies that may be long-term buy and holds.

The screen

As stock markets get close to retesting their 2022 lows, investors with a long-term outlook may have their eyes peeled for long-term bargains.

Valuation multiples, such as the price-to-earnings ratio, may not be that telling when used in isolation. Certain companies tend to consistently trade at higher multiples than their peers, owing to factors such as brand value, growth prospects and intellectual property. To work around this limitation, we decided to screen for companies that have substantially lower valuation ratios relative to where they themselves have traded in the past five years.

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;
  • Must pay a dividend (yield greater than zero);
  • Last 12 months’ net income greater than zero;
  • Limited to health care, telecom, utilities, or consumer non-cyclicals sectors, which tend to be less affected during times of economic uncertainty.

We ranked the 25 companies (top 10 displayed) that passed our screen using a multifactor ranking of 1) price-to-book; 2) price-to-earnings; and 3) price-to-sales. Each metric was ranked based on the company’s current valuation ratio, relative its own five-year historical average (five-year average not shown). A higher discount percentage was ranked favourably, as this indicates that the stock is trading at a cheaper multiple today than its historical average.

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What we found

Companies trading at cheaper multiples today than their historical averages

1Premium BrandsPBH-TCons. Non-Cycl.3,964.
2Quebecor Inc.QBR-B-TTelecom5,975.610.827.41.416.74.647.8-13.5-7.74.725.55
3Canadian TireCTC-A-TCons. Non-Cycl.9,
4Northland PowerNPI-TUtilities9,732.115.541.03.8-10.92.749.
5Saputo Inc.SAP-TCons. Non-Cycl.13,693.832.4-19.10.734.41.832.64.317.02.232.77
6Cogeco Comm.CCA-TTelecom3,310.811.812.11.714.11.818.5-34.6-26.83.972.15
7North West Co. Inc.NWC-TCons. Non-Cycl.1,545.212.519.70.7-2.72.820.0-2.6-3.74.732.28
7Molson Coors CdaTPX-B-TCons. Non-Cycl.13,975.016.521.
9Rogers Comm.RCI-B-TTelecom27,756.518.4-
10Atco Ltd.ACO-X-TUtilities5,041.713.620.

Source: FactSet

* North West Co. and Molson Coors Canada tied for 7th place in our multifactor ranking.

Interestingly, despite having no screening parameters around total returns, the average year-to-date return of our top 10 list is a decline of 4.4 per cent, considerably outperforming the broader Canadian market, which has fallen around 13.5 per cent. Our screen implicitly identifies companies with the strongest fundamentals (sales, earnings, book value), relative to their stock price. This, combined with trading in defensive sectors, may help explain the price outperformance.

Premium Brands Corp. PBH-T, a food manufacturing and distribution company, topped our screen, trading at a substantial discount to all three valuation multiples. It recently issued an upbeat 2022 sales forecast on this past August’s earnings call, however, did not increase its profitability guidance – because of lingering concerns such as inflation and supply chain issues. These apprehensions may explain the year-to-date returns of minus 29 per cent. Currently, Premium Brands is trading at a 38-per-cent discount or more to its historical P/E and price-to-book ratios, suggesting that the sell-off may have been overdone.

Quebecor Inc. QBR-B-T, a telecommunications provider, ranked No. 2 on our screen, trading at a particularly high discount to its historical book value by 47.8 per cent. Income seekers will be pleased to hear that Quebecor pays a substantial dividend of 4.7 per cent, which analysts expect Quebecor to continue growing by 5 per cent in 2023. With the possibility of a looming recession, consumer spending on cellphone services and internet should remain sturdy, as these could be considered essential services in today’s interconnected society. Quebecor entered into a definitive agreement to purchase Freedom Mobile in August, looking to further its regional influence.

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 a vice-president at FactSet Canada’s consulting division.

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