What are we looking for?
Canadian industrial stocks poised to benefit from a low loonie and a growing U.S. economy.
Expectations are currently running high for a large industrial expansion in the United States this year based on the stated policies of a Trump White House. With infrastructure improvements and increased deficit spending in the works, market watchers expect a continuation of the current bull market for U.S. industrial stocks (up 17.9 per cent in the past 12 months). With the Canadian dollar now sitting at a significant discount to its U.S. counterpart, domestic manufacturers are also poised to benefit in 2017.
The screen
We will be using Recognia Strategy Builder to search for Canadian manufacturing stocks offering reasonable valuations and efficient operations.
We begin by setting a minimum market cap threshold of $125-million. This gives us roughly the largest 30 per cent of companies in the market.
Next, we will look for efficient operations as measured by a company's operating margin. We will screen for manufacturers with operating margins of 5 per cent or more. Operating margin is a measure of the profit a company makes on each dollar of revenue – higher operating margins are preferred. In addition, to ensure a company's operations are scalable, we will look at revenue per employee. The idea is that if a company has a higher revenue per employee, it can add new revenue without adding a lot of new labour costs. We will select only companies with revenue per employee of $75,000 or more.
Finally, to ensure we don't overpay for our investments, we will filter for forward price-to-earnings ratios of 20 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?
Topping our list is Canadian auto-parts giant Magna International. With a market cap of more than $22-billion and a very low forward P/E ratio of just 8.7, Magna has strong prospects for growth based on growing exports to the United States and overseas. In early November, the company announced third-quarter results that beat analyst expectations for earnings and revenue by a wide margin.
Although known mainly as an auto parts manufacturer, Linamar Corp. also manufactures parts for a variety of other industries. With the highest operating margin our list, Linamar looks poised to benefit from an upswing in Canadian industrial manufacturing.
The highest revenue per employee on our list belongs to Tree Island Steel, a Richmond, B.C.-based manufacturer of wire and wire products. Tree Island also has a very low forward P/E ratio of 8.4, making it well valued compared with its peers.
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 25.8 per cent annualized return compared to 5.3 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.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.