What are we looking for?
Canadian stocks offering the potential for long-term earnings growth while providing reasonable valuations and efficient operations today.
With the Canadian stock market now up more than 20 per cent from its January low, many investors are beginning to question if there are still good values to be found. In Benjamin Graham's classic 1949 book, The Intelligent Investor, he asserts a number of principles when shopping for companies offering growth at a reasonable price (GARP). Today, we put together our own formulation looking for long-term earnings growth, dividends and reasonable forward price-to-earnings ratios.
The screen
We will be using Recognia Strategy Builder to identify well-valued companies in the Canadian market using value investing criteria.
We begin by setting a minimum market capitalization threshold of $500-million. Next, we will employ three screening criteria to identify stocks that would be of interest to bargain-hunting investors. Specifically, we are looking for companies with forward price-to-earnings ratios of less than 17, a five-year projected annual EPS growth rate of 10 per cent or more and dividend yield of 1 per cent or more.
Finally, to look for stocks with efficient business models, we will select only companies with operating margins of 10 per cent or greater. Operating margin is a measure of the profit a company makes on each dollar of revenue – higher operating margins are preferred.
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?
Bank of Nova Scotia tops our list with a 12-per-cent projected EPS growth rate and 25.9-per-cent operating margin. The company also has the lowest forward P/E ratio of any of the three Canadian banks on our list. On May 31, the company announced unexpectedly good second-quarter results, beating analyst expectations for both revenue and earnings.
Winnipeg-based Exchange Income Corp. is the smallest company on our list with a market cap of $900-million. Exchange Income is a holding company for cash-generating businesses in the aviation and manufacturing sectors. The stock currently has a 6-per-cent dividend yield and has a five-year projected EPS growth rate of 50.3 per cent.
The highest dividend yield on our list belongs to TransAlta Renewables at 6.6 per cent. TransAlta Renewables is primarily an electricity producer using wind, hydro and gas assets in Canada and Australia. The renewable aspect of its business also contributes to a very high operating margin of 40.1 per cent.
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.