What are we looking for?
Manufacturing has been an underperforming sector of the Canadian market, down 2.9 per cent over the past 12 months. Only basic materials and cyclical consumer goods have performed more poorly. Meanwhile, the Canadian dollar is down more than 16 per cent versus the greenback in this same period. A lower dollar makes Canadian manufactured exports less expensive and should boost the fortunes of the manufacturing sector in the coming quarters.
The screen
We will be using Recognia Strategy Builder to search for Canadian manufacturing stocks poised to benefit from a lower Canadian dollar.
We begin by setting a minimum market cap threshold of $500-million.
Next, we will look for companies with reasonable valuations by screening for forward price-to-earnings ratios of 25 or less. We also limit our results to companies with projected EPS growth rates of at least 5 per cent in the coming year.
Finally, to ensure we are not taking on investments with high levels of debt going into a period of possible interest rate increases, we will filter for companies with debt-to-equity ratios of 1.2 or less.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Magna International is the largest company on our list with a market cap of more than $28-billion. Based in Aurora, Ont., the auto parts giant supplies North American manufacturers as well as other firms worldwide.
Magna is expected to grow earnings at more than 64 per cent this year, based on analysts' estimates.
With its low debt-to-equity and high projected earning per share growth, Guelph, Ont.-headquartered Linamar Corp., another auto parts maker, also looks poised to benefit from an upswing in Canadian manufacturing.
Vaughan, Ont.-based Martinrea International has the lowest forward P/E on our list at just 9.3. Martinrea manufactures metal parts and assemblies for the automotive and industrial sectors.
Historical performance
Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 29.1 per cent annualized return compared to 4 per cent for the S&P/TSX composite index and 4.3 per cent for the S&P/TSX 60.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.