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What are we looking for?

Value stocks that are screened with consideration to sharia investing.

The screen

As investing trends focused on environmental, social and governance (ESG) factors continue to proliferate among retail and institutional investors, there is more awareness surrounding different investor beliefs and how best to accommodate them. One requiring a particularly high level of detail and care in order to select appropriate stocks is sharia-compliant investing.

Sharia-compliant investments refer to investments that are in accordance with Islamic principles. In today’s strategy, I’ve used CPMS and Sustainalytics ESG data to search for Canadian value stocks that reflect common filters described in the FTSE Shariah Global Equity Index criteria. The criteria I applied do not guarantee sharia compliance. My universe of stocks was selected based on the following criteria:

  • Companies are screened out if they generate revenue from any of the following activities: alcohol; pork; tobacco; adult entertainment; gambling; weapons and defence; stem-cell research; or conventional finance such as non-Islamic banking, finance and insurance, etc.;
  • Companies must have the following three financial ratios satisfied:
  1. Accounts receivable are less than 50 per cent of total assets;
  2. Total debt is less than 33 per cent of total assets;
  3. Cash plus interest are less than 33 per cent of total assets.
  • Companies classified as banks/insurance companies based on Morningstar’s sector classification are removed.

The resulting universe today consists of 178 Canadian stocks. In order to look for undervalued companies, I then took this universe and ranked it according to price-to-trailing-earnings (low values preferred) and price-to-book-value (low values preferred).

More about Morningstar and Sustainalytics

Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 120 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world. Sustainalytics, a leading independent global provider of ESG research and ratings, is a strategic partner to Morningstar. The firm’s company-level ESG ratings underpin Morningstar’s Sustainability Rating for funds.

What we found

To narrow down the list of 178 sharia-compliant stocks, I applied several value-oriented screens; qualifying stocks were required to have:

  • A trailing P/E ratio in the top two-thirds of peers (today this value is 21.9 times or less);
  • A P/B ratio in the top two-thirds of peers (today this value is 1.7 times or less);
  • Quarterly earnings momentum (a growth metric) of 0.01 per cent or higher;
  • A dividend-payout ratio (a measure of dividends per share dividend by earnings per share) less than 80 per cent to ensure companies have additional cash available for future growth;
  • A free-cash-flow-to-debt ratio (a measure of liquidity) greater than or equal to 0.01.

After applying these screens, 14 stocks of the original 178 met all of the above criteria. Stocks that qualify for purchase into the strategy today are listed in the accompanying table.

14 TSX value stocks surfaced using sharia-investing screen

Rank Company Ticker Market Cap ($Mil) Recent Price ($) Div. Yield (%) Trailing 1Yr Price Chg (%) Trailing P/E Price/Book Qtrly Earns Momentum (%) Div. Payout Ratio (%) Free CF/Debt
1 Canfor Corp. CFP-T 2,137.7 17.00 0.0 -41.1 3.5 1.0 13.5 0.0 1.3
2 Linamar Corp. LNR-T 3,143.0 48.09 1.0 -33.8 5.4 0.9 1.0 5.4 0.2
3 Martinrea International Inc. MRE-T 1,043.1 12.17 1.5 -15.4 5.5 1.0 0.4 6.8 0.1
4 AGF Management Ltd. AGF-B-T 380.8 4.82 6.6 -36.4 7.5 0.4 7.5 50.0 0.2
5 Capstone Mining Corp. CS-T 255.7 0.64 0.0 -54.0 9.5 0.2 22.4 0.0 0.1
6 Interfor Corp. IFP-T 1,095.2 15.91 0.0 -31.7 6.5 1.1 4.7 0.0 1.1
7 Russel Metals Inc. RUS-T 1,457.0 23.46 6.5 -25.0 7.2 1.6 19.1 46.5 0.2
8 Whitecap Resources Inc. WCP-T 1,920.8 4.62 7.0 -48.6 11.7 0.6 39.7 78.2 0.1
9 Wajax Corp. WJX-T 388.1 19.34 5.2 -13.0 8.2 1.3 4.9 42.4 0.1
10 Magna International Inc. MG-T 22,599.7 67.56 2.6 -3.8 7.9 1.6 3.6 19.1 0.5
11 Husky Energy Inc. HSE-T 16,785.5 16.70 3.0 -7.4 11.1 0.9 36.6 18.3 0.2
12 Exco Technologies Ltd. XTC-T 403.3 9.64 3.5 -0.1 9.5 1.2 9.5 32.8 1.5
13 Dundee Precious Metals DPM-T 633.7 3.55 0.0 20.7 12.8 0.7 40.4 0.0 2.0
14 Uni-Select Inc. UNS-T 801.2 18.95 2.0 -30.3 10.8 1.1 1.1 21.0 0.2

Morningstar CPMS

As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here. In addition, investors who wish to follow sharia compliance should be sure to do their own research on each of these companies before investing to determine whether they meet their own personal guidelines and beliefs.

Emily Halverson-Duncan, CFA, is a director, CPMS sales at Morningstar Research Inc.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 01/03/24 3:57pm EST.

SymbolName% changeLast
Canfor Corp
Linamar Corp
Martinrea International Inc
AGF Management Ltd Cl B NV
Capstone Mining Corp
Interfor Corp
Russel Metals
Whitecap Resources Inc
Wajax Corp
Magna International Inc
Exco Tech
Dundee Precious Metals Inc

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