What are we looking for?
Large cap stocks that have improved their profitability in an inflationary environment.
With the end of the earnings season, Canadian companies should have reported approximately three fiscal quarters when inflation was higher than 2 per cent, which gives us enough information to properly identify companies that are profiting from higher inflation.
We will focus on companies that increased their return on capital, or ROC, in the past three months and in the past year, as they are likely to continue to deliver solid performance if inflation remains prominent.
ROC is a great metric for comparing the profitability of companies with various degrees of leverage because the metric – unlike return on equity, for example – is unaffected by company leverage.
The screen
We screened Canadian stocks focusing on the following criteria:
- Market capitalization higher than $10-billion;
- Three-month change in ROC – company must have increased its ROC by at least 1 per cent in the past quarter;
- One-year change in ROC – company must have increased its ROC by at least 3 per cent in the past year;
For informational purposes, we have also included trailing 12-month ROC, five-year average ROC, price-to-earnings, dividend yield, and one-year price return. Please note that some ratios may be shown as of end of previous quarter.
More about Inovestor
Inovestor for Advisors is a fundamental-analysis research platform specializing in the economic value-added (EVA) approach. With Inovestor, advisors can quickly identify attractive investment opportunities, outsource their stock picking by using model portfolios, and easily communicate investment decisions with clients through client-friendly reports.
What we found
West Fraser Timber Co. Ltd. has the highest one-year ROC change, most recent ROC and five-year average ROC standing at 61.1 per cent, 83.9 per cent, and 29.8 per cent, respectively. Last Thursday, U.S. housing starts in February once again showed robust numbers, up 22 per cent from the same month last year. Many observers point to chronic underbuilding in Canada and the United States, coupled with robust demand, as favourable to sustainably higher lumber prices.
Casualty and property insurer Intact Financial Corp. reported solid results, but behind others on this list, with a one-year ROC increase of 9.9 per cent. We think Intact may need a bit more time to effectively capture the interest rate tailwind. As rates increase, the bonds that Intact holds provide a higher expected return because of the higher yield. The three-year Canadian bond yield, a proxy for interest income earned by the company, has increased sharply from the start of the year, from 1.02 per cent to 1.9 per cent.
Arc Resources Ltd., an oil and gas company, has the largest increase in ROC in the past three months at 9.5 per cent, and with the increase in oil prices since the last quarter, investors should also expect an impressive quarter ahead.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
Anthony Ménard, CFA, is vice-president of data management at Inovestor.
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