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What are we looking for?

So far this year, the Canadian market has been doing fairly well and recovering from the sharp December pullback. The recent rebound makes it as good a time as any to look for Canadian stocks that have a sustainable performance and are trading in an attractive price range.

The screen

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

  • Market capitalization of more than $1-billion;
  • 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 greater pace than the cost 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;
  • Economic performance index (EPI) of more than one and a positive EPI 12-month change. This is a key criterion as it calculates the return on capital to cost of capital. An EPI of more than one indicates that the company is generating wealth for the shareholders – for every dollar invested into the company, more than one dollar is generated in returns;
  • Free-cash-flow-to-capital ratio greater than 5 per cent. This ratio 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 and more than 5 per cent is excellent.
  • Future-growth-value-to-market-value (FGV/MV) between 40 per cent and minus 70 per cent. 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, dividend yield and one-year return (as of last month’s end). Please note that some ratios may be reported at the end of the previous quarter.

More about Inovestor

Inovestor for Advisors is a research platform based on fundamental analysis specializing in the economic value-added (EVA) method. It helps advisers quickly identify attractive investment opportunities and easily communicate them to their clients through client-friendly reports. In addition, Inovestor allows investors 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

First, by arranging our findings based on one-year returns, we notice that Largo Resources Ltd. – a metals and mining company – comes out on top. Largo has enjoyed impressive share-price growth of 104.5 per cent, yet with its current FGV/MV ratio of minus 5.6 per cent the stock can be considered as trading slightly below par. In addition, the EPI 12-month change of 4.7 per cent is the highest on our list and represents the strongest growth in return on capital compared with the cost of capital.

On the other hand, the most effective wealth creator is retail chain Dollarama Inc. The wealth-creation ability is seen through the EPI figure, which currently stands at 5.6. This is a great ratio and, as in this case, often comes at a premium. Even though Dollarama’s stock has suffered a 33-per-cent decline over the past 12 months, it remains trading at a 25.7-per-cent premium, as shown by the FGV/MV figure.

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

Select TSX stocks creating shareholder wealth

Company Ticker Recent Price ($) Market Cap ($Mil) FCF-to-Capital (%) EPI EVA 12M Change (%) EPI 12M Change (%) FGV on MV Div. Yield (%) 1Yr Return (%)
Largo Resources Ltd. LGO-T 2.72 1,425.4 62.1 4.8 1,398.5 4.7 -5.6 n/a 104.5
Great Canadian Gaming Corp. GC-T 53.46 3,262.9 14.4 2.6 327.0 0.9 18.8 n/a 58.2
Quebecor Inc. QBR-B-T 30.62 7,066.5 5.3 1.9 140.7 0.3 -68.1 0.6 29.2
CGI Group Inc. GIB-A-T 86.6 24,136.3 13.2 2.1 85.9 0.4 18.9 n/a 26.8
MTY Food Group Inc. MTY-T 70.61 1,776.5 11.0 2.8 215.9 0.8 7.0 0.9 25.9
Firstservice Corp. FSV-T 106.46 3,829.7 6.1 2.5 74.0 0.4 29.5 0.6 21.1
Waste Connections Inc. WCN-T 107.09 28,204.6 5.9 1.6 53.5 0.4 34.5 0.7 20.1
Colliers International Group CIGI-T 82.78 3,245.0 15.2 2.1 39.6 0.0 25.0 0.1 9.1
Rogers Communications Inc. B RCI-B-T 69.69 35,877.3 5.9 1.8 80.4 0.4 19.6 2.7 8.8
Parex Resources Inc. PXT-T 18.98 2,950.1 20.2 2.4 1,200.8 1.7 -18.4 n/a 4.5
Winpak Ltd. WPK-T 48.3 3,139.5 6.9 2.3 44.1 0.3 18.6 0.3 3.2
Methanex Corp. MX-T 76.36 5,990.1 13.7 1.2 424.8 0.6 31.7 1.6 0.3
Transcontinental Inc. TCL-A-T 21.37 1,866.5 7.2 1.4 85.7 0.1 -21.7 3.8 -14.0
Interfor Corp. IFP-T 17.8 1,236.0 15.7 1.4 429.7 0.4 -33.8 n/a -15.7
BRP Inc. DOO-T 39.13 3,800.8 15.5 2.8 95.6 0.3 0.7 0.7 -15.9
Spin Master Corp. TOY-T 44.01 4,479.8 25.0 5.4 71.4 0.5 -10.0 n/a -18.5
Dollarama Inc. DOL-T 35.06 11,217.3 20.1 5.6 32.6 0.2 25.7 0.4 -33.0

Source: Inovestor for Advisors

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