Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.
What are we looking for?
Profitable Canadian large cap stocks.
The selection of quality stocks for the long haul takes on increasing importance during volatile markets. Large, established companies that generate consistent profits with low operating costs can provide a margin of safety when markets fall.
The screen
We will be using Recognia Strategy Builder to search for profitable Canadian large cap stocks.
We begin by setting a minimum market capitalization threshold of $5-billion to focus on larger, more stable and established companies in the market. Next, we will look for companies with an operating margin of at least 20 per cent. Operating margin is a measure of a company's profitability that shows how much profit a company makes on each dollar of revenue.
Next, we will look for companies with a return on sales of at least 30 per cent. Return on sales is defined as the company's income after taxes divided by revenue and expressed as a percentage.
Finally, in order to focus on companies with scalable business models, we will select only firms with revenue per employee of at least $500,000. Companies with higher revenues per employee are better able to expand their businesses without adding new costs.
More about Recognia
Recognia is a global leader in quantitative and technical analysis. It is accessible by more than 20 million investors and traders worldwide through leading retail online brokers. Recognia covers 85 exchanges worldwide, and analyzes 65,000 instruments daily including stocks, indexes, ETFs, currencies and futures.
What did we find?
Silver Wheaton Corp. has the highest operating margin, return on sales and revenue per employee of any company in our screen. Silver Wheaton is a pure play silver mining company based in Vancouver.
TransCanada Corp. is the largest company on our screen with a market cap of more than $43-billion. Based in Calgary, the company operates oil and gas pipelines and other energy infrastructure across Canada and the United States. The company has strong profitability with an operating margin of 29 per cent.
Peyto Exploration and Development Corp. is a Calgary-based energy company focusing on unconventional gas assets in Alberta's deep basin. Peyto is the smallest company in our screen with a market cap of just $5.6-billion. The company has demonstrated profitability with a return on sales toward the top end of companies on our screen.
Historical performance
Recognia Strategy Builder provides a back-testing 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 7.8 per cent annualized return compared to 5.6 per cent for the S&P TSX 60 Index.
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.