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What are we looking for?

Canada’s most profitable companies that also exhibit low sensitivity to the index.

The screen

As discussions over the North American free-trade agreement drag on, some Canadian investors may be feeling a bit cautious on their investments, but considering the strength of the U.S. economy, may not want to pull back. This week, I look for companies that have shown a recent history of profitability but have also exhibited lower volatility relative to the S&P/TSX Composite Total Return Index. To find these companies, I first ranked the CPMS Canadian Universe of 691 stocks by the following:

  • Five-year historical beta (recall beta measures the sensitivity of a stock to an index, in this case the S&P/TSX Composite. Historically, stocks with beta less than 1 move less than the benchmark in trending markets. Here, lower betas are preferred as a defensive measure in case of a market pullback);
  • Net profit margin in each of the past five reported quarters (recall net profit margin is the company’s bottom-line earnings per share divided by top-line revenue, high values preferred);
  • Latest reported return on equity. 

To qualify, stocks must be ranked in the top 35 per cent of the universe and must have a market cap greater than $100-million (this figure is meant to leave out the bottom one-third of stocks by size in the CPMS Canadian universe). Unit trusts were excluded in this analysis.

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More about Morningstar

Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.

What we found

I used Morningstar CPMS to backtest this strategy from November, 2002, to August, 2018. During this process, a maximum of 20 stocks were purchased and equally weighted with no more than four per economic sector. Once a month, stocks were sold if their rank fell below the top 35 per cent of the ranked universe or the company missed earnings expectations by more than 5 per cent. When sold, the positions were replaced with the highest-ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 15.8 per cent while the S&P/TSX Composite Total Return Index advanced 8.8 per cent. Year-to-date, the strategy has returned 9.6 per cent. The stocks that qualify for purchase today are listed in the accompanying table.

Select low-beta stocks showing strong profitability

Rank Company Ticker GICS Sector Market Cap ($Mil) Latest Reported NPM* (%) NPM, 1Q Ago (%) NPM, 2Q Ago (%) NPM, 3Q Ago (%) NPM, 4Q Ago (%) Latest Reported ROE (%) 5Y Historical Beta Latest Earns Surprise (%) Recent Price ($) Div. Yield (%)
1 Clairvest Group Inc. CVG-T Financials 748.3 63.2 66.9 64.2 65.0 61.0 29.1 0.2 323.9 49.20 0.2
2 Brookfield Real Estate Services BRE-T Real Estate 152.6 42.6 42.1 41.6 40.9 37.5 **19,588.5 0.3 0.0 16.09 8.4
3 Atrium Mortgage Investment AI-T Financials 505.0 58.2 57.7 57.1 56.9 58.0 9.0 0.4 0.0 13.95 6.5
4 Timbercreek Financial TF-T Financials 746.2 54.8 56.9 58.6 61.4 64.1 7.6 0.4 -0.7 9.39 7.3
5 Alaris Royalty Corp. AD-T Financials 755.8 79.5 79.3 75.8 71.8 70.7 12.6 0.8 -0.6 20.71 7.8
6 Enbridge IF Holdings ENF-T Energy 5,785.7 97.8 96.9 96.3 96.7 96.8 7.8 0.7 0.1 32.95 6.9
7 Bausch Health Comp. BHC-T Health Care 11,224.9 15.6 15.8 15.4 16.1 17.5 27.5 -0.9 3.3 32.19 0.0
8 Descartes Systems DSG-T Info Tech 3,426.6 22.5 22.2 22.7 22.6 23.1 11.7 0.0 32.6 44.58 0.0
9 Canadian National Railway CNR-T Industrials 82,490.9 28.0 27.9 28.9 29.4 29.7 22.6 0.9 1.5 112.36 1.6
10 Alimentation Couche-Tard ATD.B-T Cons. Staples 36,663.4 2.8 2.9 3.1 3.3 3.3 21.6 -0.6 3.7 64.98 0.6
11 Evertz Technologies ET-T Info Tech 1,279.8 14.9 13.6 16.1 15.9 16.6 17.9 0.1 0.0 16.73 4.3
12 Franco-Nevada Corp. FNV-T Materials 15,173.6 33.8 32.4 29.6 29.1 28.5 4.8 0.8 0.0 81.50 1.5
13 TransAlta Renewables RNW-T Utilities 3,032.0 31.9 25.0 20.2 30.9 45.0 6.7 0.8 10.8 11.55 8.1
14 Enghouse Systems Ltd. ENGH-T Info Tech 2,212.9 17.5 16.3 14.8 15.1 15.0 18.7 0.2 8.0 81.38 0.9
15 Rogers Communications RCI.B-T Telecom Svcs 34,281.4 13.8 13.6 12.8 12.4 11.8 29.4 0.5 0.3 66.59 2.9
16 Winpak Ltd. WPK-T Materials 3,108.3 12.2 12.1 12.2 12.3 12.4 13.0 -0.1 0.0 47.82 0.3
17 Canfor Pulp Products CFX-T Materials 1,742.2 13.8 11.6 8.7 6.4 7.2 31.2 0.5 2.0 26.70 0.9
18 Ritchie Bros. Auctions RBA-T Industrials 5,083.3 16.6 16.5 17.7 18.9 21.3 15.7 0.3 9.5 46.98 2.0
19 West Fraser Timber Co. WFT-T Materials 5,502.6 16.9 14.3 12.9 11.5 11.0 34.8 1.0 13.5 77.12 1.0
20 NFI Group Inc. NFI-T Industrials 3,271.3 7.1 6.8 6.8 6.5 6.3 22.6 0.0 1.1 52.05 2.9

Source: Morningstar Canada

*NPM stands for net profit margin.
**The ROE for Brookfield looks exuberant in this table due to the low book value of equity for the company.

It is always recommended to speak to a financial adviser or investment professional before investing.

Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.

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