What are we looking for?
TSX-listed companies with predictable future earnings.
The screen
The effects of COVID-19 have made forecasting earnings increasingly difficult for many companies. According to Morgan Stanley, more than 70 per cent of companies in the Russell 1000 Index, which represents the top 1,000 companies by market capitalization in the United States, have withdrawn or declined to provide earnings guidance in 2020. This lack of information has made it even more challenging for investors to find companies with stable earnings, while also causing a significant rise in the number of quarterly earnings surprises.
Today, we search for TSX-listed companies poised to deliver predictable earnings during uncertain times.
- First, we screen for TSX-listed companies with a market cap greater than $1-billion.
- Next, we screen for companies with high earnings quality. We use the Refinitiv StarMine Earnings Quality model to screen for companies with a current earnings quality score greater than or equal to 90. The Earnings Quality model is a percentile ranking of stocks based on the sustainability of earnings, with 100 representing the highest rank.
- Finally, we screen for companies poised to beat analyst earnings estimates over the next 12-month period using earnings per share Predicted Surprise, defined as the difference between the mean estimate of Street analysts and the Refinitiv SmartEstimate. The SmartEstimate is a weighted average of the analysts' estimates, with more weight given to more recent estimates and more accurate analysts. Only SmartEstimates that came in higher than mean estimates were considered.
More about Refinitiv StarMine
Refinitiv is one of the world’s largest providers of financial market data and infrastructure, serving more than 40,000 institutions worldwide. StarMine, Refinitiv’s proprietary quant-based analytics, includes 116 quantitative models covering value, momentum, ownership, risk and quality, and are built using industry-leading content including I/B/E/S Estimates, Refinitiv Fundamentals, Reuters News and more.
What we found
The screen, ranked by StarMine Earnings Quality, produced six companies that demonstrate strong and predictable earnings. The basic materials sector, which represents five of the six companies, is the second-largest sector by market capitalization in the S&P/TSX Composite, at 16 per cent. Given the poor performance of the financials sector, in addition to the strong performance of silver and gold, basic materials is a sector that large-cap investors seeking predictable earnings should pay attention to.
Dundee Precious Metals Inc., which ranked highest in the earnings quality model, is a Toronto-based miner that operates the Chelopech underground copper-gold mine and the high-grade Ade Tepe mine in Bulgaria. Dundee also owns the Tsumeb copper smelter in Namibia, which processes Chelopech’s copper-gold concentrate. The stock has been a strong performer in 2020, up nearly 70 per cent year to date, which is partly owing to the surge in the price of gold, currently trading at around US$1,910 an ounce. The total cash costs for Dundee in 2019 were US$642 an ounce, and production costs are expected to remain below US$610 in each of the next three years, which should generate strong cash flow and profit margins.
Richie Bros. Auctioneers Inc. offers customers end-to-end solutions for buying and selling heavy equipment, trucks and other assets. Despite the economic climate in North America this year, the stock is up more than 35 per cent year to date, and Refinitiv is predicting an earnings-per-share surprise of 1.54 per cent, which is deemed to be significant in the model. The company has benefited from its online marketplace, which saw gross transition volume (total proceeds from all items sold) for its online segment increase by 16.4 per cent year-over-year, compared with 1.1 per cent for the live on-site segment. This is a trend that should improve profitability as more transactions move online. A final tailwind for Richie Bros. is the U.S. election; regardless of which party is successful, both have plans to increase infrastructure spending, which should be a boost to Richie Bros. transaction volumes.
Investors are advised to do their own research before trading in any of the securities shown.
Stephen Donovan, MBA, is customer success leader, Refinitiv commodities & buy-side trading for the Americas.
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