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What are we looking for?

When markets are unstable and volatility is on the rise, investors tend to investigate alternative defensive products in order to protect their wealth. The materials sector can be seen as defensive insofar as gold (its production being a key part of this sector) is negatively correlated to the market. Last month, because of the strong rally of gold and silver, materials was one of the best performing sectors in Canada. The sector rose 5.7 per cent in August compared with the S&P/TSX Composite Index, which gained 0.2 per cent. Year to date, the sector has advanced 22.9 per cent compared with 14.8 per cent for the S&P/TSX.

Today, we will take a deeper dive into this sector and analyze some companies that have benefited from this trend.

The screen

We screened the Canadian materials sector by focusing on the following criteria:

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  • Market capitalization greater than $1-billion;
  • A positive 12-month sales change – a positive figure shows us that there is growth and progress in the company’s operations;
  • A positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profit is increasing at a faster and greater pace than the costs of capital. The EVA is the economic profit generated by the company and is calculated as the net operating profit after tax minus capital expenses;
  • A future-growth-value-to-market-value ratio (FGV/MV). This ratio represents the proportion of the market value of the company that is made up of future growth expectations rather than the actual profit generated. The higher the percentage, the higher the baked-in premium for expected growth and the higher the risk;
  • Free-cash-flow-to-capital ratio. This metric gives us an idea of how efficiently the company converts its invested capital to free cash flow, which is the amount left after all capital expenditures have been accounted for. It is an important measure because it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are always looking for a positive ratio;
  • A low beta – a stock with a beta less than one is considered less volatile than the market.

For informational purposes, we have also included recent stock price, dividend yield and one-year return. Please note that some ratios may be reported at end-of-previous quarter.

More about Inovester

Inovestor for Advisors is a fundamental-analysis research platform specializing in the economic value-added (EVA) approach. With Inovestor, advisers can quickly identify attractive investment opportunities, outsource their stock picking by using model portfolios, and easily communicate investment decisions with clients through client-friendly reports. In addition, Inovestor allows users to create personalized filters, build custom portfolios and carry out in-depth analysis on more than 13,000 companies (Canadian stocks, U.S. stocks and American depositary receipts).

What we found

Kirkland Lake Gold Ltd., a company with gold mines in Canada and Australia, generated the best returns for its shareholders over the past 12 months of 161.9 per cent. This rally led the stock to trade at a premium of 57.1 per cent, as can be seen by the FGV/MV figure.

Centerra Gold Inc., a gold mining and exploration company, is the only name on our list whose stock is trading at a discount (FGV/MV of minus 33.6 per cent). In addition, with a beta close to zero, Centerra is virtually unaffected by market fluctuations, giving this stock a defensive edge.

Investors are advised to do further research before investing in any of the companies listed in the accompanying table.

Select TSX-listed materials stocks

CompanyTickerMkt. Cap. ($ Mil.)Sales 12M Chg. (%)FGV/MV (%)FCF/Capital (%)BetaEVA 12M Chg. (%)Div. Yld. (%)1Y Rtn. (%)Recent Price ($)
Franco-Nevada Corp.FNV-T23,844.03.672.4-2.30.317.81.260.8127.23
Kirkland Lake Gold Ltd.KL-T13,130.541.657.116.80.9204.10.3161.962.47
Detour Gold Corp.DGC-T3,894.98.941.14.20.822.40.0117.122.08
Centerra Gold Inc.CG-T3,252.223.9-33.63.70.2261.80.0111.011.12
Pretium Resources Inc.PVG-T3,170.98.361.93.70.7127.70.078.417.18
SSR Mining Inc.SSRM-T2,493.025.549.2-3.10.7146.50.085.920.54
Ero Copper Corp.ERO-T1,840.092.882.37.12.768.70.0133.821.6
Labrador Iron Ore RoyaltyLIF-T1,626.952.260.44.92.4207.82.90.525.42
Torex Gold Resources Inc.TXG-T1,622.762.430.03.70.1480.90.097.619.03
Semafo Inc.SMF-T1,576.484.88.84.50.4791.10.054.24.72

Source: Inovestor for Advisors

Noor Hussain is an analyst and account executive for Inovestor Inc.

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