What are we looking for?
Large financials with attractive trade-offs between performance and valuation.
Most investors expect interest rates to fall in the short to medium term. However, inflation tends to be sticky, at least in the medium term. Consequently, we do not expect rates to return to the abnormally low levels seen after the global financial crisis.
We believe that a structurally higher interest-rate environment can benefit companies in the financial sector, as their operations tend to be positively affected by greater sustained nominal investment returns.
The screen
We screened Canadian financials focusing on the following criteria:
- market capitalization above $10-billion;
- price-to-intrinsic value below 1. The intrinsic value is calculated from an EVA discounted cash-flow model in which the assumptions are automatically determined by our software based on historical trends;
- StockPointer (SP) score greater than 65. The score mainly considers risk-adjusted return on capital, earnings-per-share growth and free cash flow. The score varies between zero and 100. A score above 65 implies a performing company;
- positive three-month NOPAT (net operating profit after tax) growth.
For information purposes, we added return on capital, economic performance index (which represents the return on capital divided by the cost of capital), price-to-earnings ratio, one-year price return and dividend yield. Please note that some ratios may be shown as of the end of the previous quarter.
More about Inovestor
Inovestor for Advisors is a fundamental-analysis research platform specializing in the economic value-added (EVA) approach. With Inovestor, advisers 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
National Bank of Canada NA-T is the sixth-largest bank in Canada and the most undervalued stock based on its price-to-intrinsic value at 0.68. It has the highest SP score standing at 72, representing remarkable quality and performance. The company has a return on capital of 15.2 per cent and a P/E ratio of 11.7, which is on par with its peers. Structurally higher interest rates could benefit National Bank by increasing its long-term net interest margin on its loan portfolio.
Great-West Lifeco Inc. GWO-T is a financial services holding company with assets in life insurance, health insurance, and retirement and investment services. It is the second-most undervalued company on our list, with a price-to-intrinsic of 0.75. It has the highest return on capital at 16.1 per cent and EPI at 1.8, while boasting a solid SP score of 69. Higher long-term interest rates may benefit the company by boosting returns on its investment portfolios.
Sun Life Financial Inc. SLF-T provides financial services in asset and wealth management and life and health insurance. It holds an impressive SP score of 71, an EPI of 1.7 and a return on capital of 15.9 per cent, all second on our list. Similarly to Great-West Lifeco, its investment portfolio could benefit from higher long-term interest rates. Additionally, insurance products, such as annuities, could become more attractive to clients, potentially boosting sales volumes in its wealth-management line.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
For more details about these stocks, subscribe to the Inovestor for Advisors platform for free.
Anthony Ménard, CFA, is vice-president of data management at Inovestor.
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