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Number Cruncher These 12 defensive TSX stocks combine value and quality

What are we looking for?

The defensive nature of value investing makes it a go-to strategy during an economic or market downturn. Today, I look for value companies that are not necessarily trading at a discount but rather at a reasonable price, what we call “quality” investing. We are screening the Canadian market with an emphasis on quality companies – those that perform defensively compared with others, regardless of market volatility.

The screen

We screened the Canadian universe by focusing on the following criteria:

  • Market capitalization greater than $1-billion;
  • Positive one-year return (as of last month’s end);
  • Positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profits are 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;
  • Positive 12-month change in the economic performance index (EPI) and a current EPI greater than one – this ratio is the return on capital to cost of capital;
  • Average annual return on capital (ROC) over five years must be greater than 10 per cent;
  • Future-growth-value-to-market-value ratio (FGV/MV) is between 40 per cent and minus 70 per cent. The chosen range was selected to eliminate stocks that are at an exaggerated premium or discount as that would increase the risk. 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.

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

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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

By generating our screener, we came up with a list of 12 companies, most of which belong to the industrials sector.

One interesting finding is Great Canadian Gaming Corp., a gaming, entertainment and hospitality company. Over the past 12 months its stock price has increased 55 per cent, the largest gain on our list, and the company is trading at a quite reasonable premium of 9.5 per cent (the FGV/MV ratio).

The increase in stock value is supported by the substantial EVA change and the significant increase in EPI over this period. The EVA change shows us that profits grew considerably but the capital charge did not follow with equal strength – this puts Great Canadian Gaming in a favourable and sustainable setting. Consequently, we can conclude that the stock is offering both a quality and growth exposure to shareholders.

Select TSX-listed stocks generating a positive economic profit

Company Ticker Recent Price ($) Market Cap. (in $Mil) Div. Yield (%) 1Yr Return (%) FGV on MV (%) EPI Avg. 5Yr ROC (%) EVA 12M Chg. (%) EPI 12M Chg. (%)
Canadian National Railway Co. CNR-T 103.56 75,547.0 1.5 2.8 22.7 2.2 15.2 160.5 0.5
Brookfield Asset Management BAM-A-T 55.42 53,140.9 1.3 3.4 -32.1 3.3 17.0 982.0 2.7
Rogers Communications Inc. RCI-B-T 70.74 36,417.8 2.9 5.6 6.4 1.9 10.3 152.8 0.6
Canadian Pacific Railway CP-T 245.21 34,966.9 0.9 8.6 36.4 1.7 13.2 115.7 0.3
Waste Connections Inc. WCN-T 102.88 27,095.8 0.7 15.8 32.3 1.6 12.0 55.3 0.4
CGI Group Inc. GIB-A-T 84.31 23,498.0 0.0 23.8 16.9 2.1 13.3 88.0 0.4
Ritchie Bros. Auctioneers Inc. RBA-T 42.97 4,666.6 1.9 25.7 31.9 1.7 12.2 82.4 0.5
Firstservice Corp. FSV-T 94.54 3,400.9 0.6 7.6 22.4 2.5 11.8 81.4 0.4
TFI International Inc. TFII-T 37.62 3,309.4 1.8 15.9 -23.8 2.0 11.6 426.5 0.8
Great Canadian Gaming Corp. GC-T 47.02 2,869.8 0.0 55.1 9.5 2.6 13.3 364.6 0.9
Boyd Group Income Fund BYD-UN-T 109.82 2,160.3 0.4 11.2 38.7 2.3 10.9 114.4 0.2
MTY Food Group Inc. MTY-T 61.14 1,538.3 0.9 17.0 -5.3 2.8 18.8 244.3 0.8

Source: Inovestor for Advisors

Readers are advised to conduct further research before investing in any of the securities shown here.

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

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