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What are we looking for?

Canadian stocks with strong profitability but whose unspectacular price movements may mean they’re not attracting much investor attention. We use the six-month price return to find stocks that may have been overlooked. A lack of buyers favours undervaluation.

The screen

We screened Canadian stocks focusing on the following criteria:

  • Market capitalization greater than $1-billion;
  • Return on capital (five-year mean) greater than 8 per cent – we’re looking for profitable companies;
  • Six-month price return between minus 5 per cent and 5 per cent – we want companies whose run-of-the-mill price movements are not attracting attention;
  • A price-to-earnings ratio that is less than 40 – we want a company that had a positive net income in the trailing 12-month period and we exclude companies with a stretched valuation.

For informational purposes, we have also included the one-month price return, one-year price return, five-year median price-to-earnings ratio, one-year earnings per share growth, annualized two-year EPS growth, and dividend yield. Please note that some ratios may be shown as of end of previous quarter.

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More about Inovestor

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 and U.S. stocks and American depositary receipts). For more details about these stocks, subscribe to the Inovestor for Advisors platform for free: inovestor.com/en-CA/store/

What we found

Canadian companies

CompanyTickerMkt. Cap. ($ Mil.)5Y Mean ROC (%)6M Price Rtn. (%)P/E1M Price Rtn. (%)1Y Price Rtn. (%)5Y Median P/E1Y EPS Grth. (%)Ann. 2Y EPS Grth. (%)Div. Yld. (%)Recent Price ($)
Stella-Jones Inc.SJ-T3,02012.04.313.0-10.125.619.651.030.91.646.15
Alim. Couche-TardATD-B-T48,87012.53.215.48.1-0.918.234.420.40.845.32
Silvercorp MetalsSVM-T1,1209.73.424.27.9-4.113.929.6-12.90.47.68
Metro Inc.MRU-T14,34013.0-1.517.70.43.118.514.514.61.758.39
Jamieson WellnessJWEL-T1,3808.3-2.035.6-9.9-4.232.213.318.01.534.34
Dollarama Inc.DOL-T17,04028.34.229.44.819.626.81.13.60.455.75
Kirkland Lake GoldKL-T14,00017.10.015.94.3-15.916.6-7.431.41.852.43
Parkland Corp.PKI-T6,1709.0-1.932.44.124.538.9-16.2-18.43.041.00
Rogers Comm.RCI-B-T31,6808.43.119.91.416.617.9-19.4-10.23.262.50
Cdn. Nat'l RailwayCNR-T95,02014.5-4.727.1-1.310.119.3-19.9-9.01.8134.21

Source: Inovestor

The top 10 stocks that met our criteria are ranked by one-year EPS growth.

Stella-Jones Inc., a producer and marketer of pressure-treated wood products, has the highest one-year EPS growth and the lowest P/E of our list, at 51 per cent and 13 respectively. Given a median P/E of 19.6 in the past five-year period, the company gives the impression of having a noticeable margin of safety. Its major business segments, utility poles and railways ties, counting for approximately 60 per cent of its sales, recorded a sluggish 1 per cent organic growth. It is plausible that clients delayed their investments owing to high lumber prices. On the other hand, other divisions, including residential lumber, more than compensated by registering a 131 per cent organic growth as renovation and lumber prices continued to strengthen. In the next quarters, those divisions are likely to decline as the lumber prices normalize, but the core business could pick up, mitigating the impact.

Alimentation Couche-Tard Inc., the convenience store and gas station giant, had a difficult start to 2021 as the stock stumbled by 16.3 per cent in the year’s first two weeks. The company’s preliminary takeover discussions with French supermarket chain Carrefour SA were not particularly appreciated by investors – nor by France’s government, which opposed any deal. More generally, in recent years investors have been increasingly nervous about the long-term outlook for gasoline-powered vehicles. On May 10, the company issued $1-billion in green bonds to be used exclusively for environmentally friendly projects and community initiatives. The market seems to consider the issuance as a signal management has a long-term transition plan. The share price is up 8.1 per cent in the past month.

Grocery and drugstore owner Metro Inc. registered a steady annual growth of 14.5 per cent and 14.6 per cent (annualized) in the past two years. The pandemic has helped the company to generate higher sales and maintain its robust growth. Despite this, the stock is up only 3.1 per cent in the past year as the market expects a slowdown in revenue as restaurants reopen. Adding Metro to a portfolio would certainly be a contrarian move because the economy should be at full speed next year. Nevertheless, the market is a complex machine of anticipation: Buying at a reasonable price when few others are interested can generate a meaningful return on longer horizons – especially if expectations in the market switch in the meantime.

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

Anthony Ménard is an investment analyst at Inovestor Asset Management.

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