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Number Cruncher Thirteen Canadian mid-cap stocks on a growth trajectory

What are we looking for

Searching for growth in Canadian mid-cap stocks.

The screen

This week, I take a look at companies in the mid-cap space in Canada that are projected to grow by analysts on the Street. Although mid-cap names in Canada are less liquid than companies you’d find in the main S&P/TSX Composite Index, these often overlooked companies can be a source of alpha in your portfolio if chosen carefully. To find companies that analysts believe have a trajectory for growth, I used Morningstar CPMS to rank stocks in our Canadian database on the following metrics:

  • Variation in current year estimates (essentially measuring the consistency or “spread” of analysts’ opinions on the current fiscal year’s earnings per share (EPS); lower figures preferred);
  • Five-year EPS deviation (a measure of how consistently, historically, a company has reported its earnings; lower figures preferred);
  • Five-year price beta (a measure of sensitivity, in this case to the main TSX Composite Index. In trending markets, a beta less than one implies that the stock has moved less than the market; lower figures preferred);
  • Latest return on equity and pre-tax return on capital;
  • Current year and next year estimated growth rates of earnings.

To qualify, companies must have a market capitalization between $100-million and $1-billion (these figures are meant to exclude the bottom one-third of companies and the top half of companies in Canada by market cap). Additionally, only stocks with at least three active analyst estimates were considered.

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More about Morningstar

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.

What we found

I used Morningstar CPMS to back test this strategy from November, 2001, to July, 2019. During this process, a maximum of 15 stocks were purchased and equally weighted with no more than four per economic sector to ensure reasonable diversification across the economy.

Once a month, stocks were sold if their rank fell below the top 35 per cent of the universe, or if analysts projected a negative growth rate of earnings. When sold, the positions were replaced with the highest ranked stock not already owned in the portfolio.

For this analysis, I’ve also included a 1-per-cent liquidity cost (implying that stocks are sold at 1 per cent lower than their price and purchased at 1 per cent higher) due to the less liquid nature of the companies being bought and sold. Over this period, the strategy (net of liquidity cost) produced an annualized total return of 13.1 per cent while the S&P/TSX Composite and Small Cap Total Return Indexes produced 7.4 per cent and 4.5 per cent, respectively.

The stocks that qualify for purchase today are listed in the table below. It is always recommended to speak to a financial adviser or investment professional before investing.

Select Canadian mid-cap stocks

RankCompanyTickerMarket Cap ($Mil)Var. in Curr. Yr Estim. (%)5Yr EPS Deviation5Yr Historical BetaROE (%)Pre-tax ROC (%)Curr. Yr Proj. Growth Rate of Earns. (%)Next Yr Proj. Growth Rate of Earns. (%)No. of Active AnalystsRecent Close ($)Div. Yield (%)
1Calian Group Ltd.CGY-T268.42.05.61.016.222.110.910.7434.043.3
2NA Construction GroupNOA-T431.69.991.60.913.810.9136.129.9515.841.0
3Teranga Gold Corp.TGZ-T578.85.440.90.80.94.10.2211.835.380.0
4Wesdome Gold Mines Ltd.WDO-T962.329.753.80.213.721.562.130.097.050.0
5goeasy Ltd.GSY-T781.47.56.21.722.814.842.621.6754.222.3
6K-Bro Linen Inc.KBL-T423.011.19.50.54.25.042.936.8639.893.0
7Martinrea International Inc.MRE-T872.12.04.81.816.614.511.713.0610.541.7
8Argonaut Gold Inc.AR-T454.911.796.31.10.82.354.8100.072.550.0
9Acadian Timber Corp.ADN-T276.28.116.20.64.45.659.28.1516.557.0
10People Corp.PEO-T555.023.021.01.08.513.745.039.179.110.0
11Clearwater SeafoodsCLR-T340.816.638.30.18.69.012.625.035.243.8
12Heroux-Devtek Inc.HRX-T685.46.010.70.78.76.914.018.4718.850.0
13Dream Unlimited Corp.DRM-T888.810.528.31.07.87.827.319.838.621.2

Source: Morningstar CPMS

Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.

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