What are we looking for?
Canadian materials stocks with momentum and compelling fundamentals.
We use a momentum approach to focus on a sector strongly linked to the runup in commodities prices. We believe that stocks with strong fundamentals will continue to perform well for the foreseeable future.
The screen
We screened Canadian stocks in the materials sector focusing on the following criteria:
- Market capitalization higher than $500-million;
- Momentum score higher than 60 – the momentum score (out of 100) tracks short- to medium-term price movements as well as momentum in terms of improving fundamentals;
- StockPointer (SP) performance score higher than 60 – the score mainly considers risk-adjusted return on capital, earnings per share growth and free cash flow per share. The score varies between zero and 100. A score above 60 is considered higher than average. This is our robust fundamentals criterion;
- Three-month sales growth higher than 3 per cent – we’re looking for companies in a hot market.
For informational purposes, we have also included return on capital and price-to-book ratios, dividend yield, one-year price return and recent stock price. Please note that some ratios shown may be as of previous quarter’s end.
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. In addition, Inovestor allows users to create personalized filters, build custom portfolios and carry out in-depth analysis on more than 13,000 companies (Canadian and U.S. stocks and American depositary receipts).
What we found
Ten companies made the list, which we have ranked by taking the average of momentum and SP performance scores. Here are three names of note:
Canfor Corp. , an integrated forest products company, has the highest average score of our list standing at 78.4 with a balanced exposure to momentum and fundamentals with a score of 77 and 79.8, respectively. Lumber is probably the most high-profile commodity during this pandemic. A hot residential housing market and elevated construction starts, along with do-it-yourself renovators, have created a supply-demand imbalance as the construction industry enters its summer sprint. A bottleneck from the lack of sawmills only exacerbates the imbalance. With its sawmills across Canada, the United States and Sweden, Canfor is well equipped to navigate this disrupted market.
Labrador Iron Ore Royalty Corp. has a juicy dividend yield of 7.6 per cent, which reflects the robust income stream from its royalties, and a dividend from its minority interest in Iron Ore Co. of Canada (a joint venture between Rio Tinto Group, Mitsubishi Corp. and Labrador Iron Ore.) The mining royalty company has solid fundamentals as shown by its SP performance score of 85.9, the highest of our screen. Iron ore prices have increased by 250 per cent in the past year as big producers such as Vale SA, Rio Tinto Group and BHP Group Ltd. cut their production by between 5 per cent and 20 per cent because of maintenance, as well as adverse weather in Australia. Combine this with strong demand from China’s steel sector and iron ore could very well continue its exceptional run.
Calibre Mining Corp. , a gold extraction company, has surprisingly high momentum with a score of 80. The price of gold has slipped about 10 per cent since August, but it is still 40 per cent higher than two years ago, creating an overall better environment for gold mining companies. The one-year price return is the lowest on our table, which suggests the impressive momentum score leans more toward Calibre’s fundamentals. The company has a return on capital of 26.5 per cent and a price-to-book of just 2.1, which are better than our list average of 22.7 per cent and 3.5, respectively.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
Anthony Ménard is an investment analyst at Inovestor Asset Management.
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Anthony Ménard, CFA