What are we looking for?
Quality stocks with growth characteristics over the short to medium term and modest share-price appreciation.
Some companies experience gradual improvements in their fundamentals, yet their stock prices remain stagnant. However, these overlooked firms keep advancing until their stock prices can no longer ignore them because of robust fundamentals.
Emphasizing quality companies that demonstrate improving fundamentals alongside reasonable price movements is paramount for making prudent investment decisions. This strategy enables investors to position themselves for long-term success while mitigating risks associated with market volatility.
The screen
We screened Canadian companies with a market capitalization greater than $1-billion looking for:
- Stockpointer (SP) score greater than 65. The score mainly considers risk-adjusted return on capital, earnings per share (EPS) growth and free cash flow per share. The score ranges from zero to 100. The higher the value, the better the company.
- Positive one-year indicator: one-year net operating profit after taxes (NOPAT) growth minus one-year share price return. The objective is to find companies with solid results while avoiding stocks that overshoot their fundamentals.
- One-year NOPAT growth between 0 per cent and 100 per cent. We cap it at 100 per cent to prevent choosing potential outliers, such as those with weak performance a year ago or unusually robust recent results.
- Positive one-year and one-quarter EPS growth;
- Price-to-earnings (P/E) ratio lower than 20.
For informational purposes, we have also included one-year price return and dividend yield.
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What we found
MTY Food Group Inc. MTY-T is a leading player in the food-service industry, known for its diverse portfolio of quick-service restaurant brands. The company obtains the highest one-year indicator value with 80.9 per cent. MTY showcases an SP score of 69, reflecting its solid operations. Its one-year NOPAT grew by 62.5 per cent and its quarterly EPS grew by 21 per cent. However, MTY’s stock price experienced a decline of 19 per cent over the past year.
Linamar Corp. LNR-T specializes in manufacturing automotive, skyjack and agricultural equipment. The company boasts a one-year indicator of 61.7 per cent, comprising a one-year NOPAT growth of 50 per cent and a one-year price return of negative 11.7 per cent. Also, Linamar’s EPS grew by 34.2 per cent over the past year, coupled with a reasonable P/E ratio of 8.2. On Feb. 1, Linamar completed the acquisition of Bourgault Industries Ltd., an agricultural equipment manufacturer that specializes in seeding systems.
Parex Resources Inc. PXT-T is an independent oil and gas exploration and production company with a primary focus on operations in Colombia. The election of Gustavo Petro in mid-2022, an anti-oil President, has sparked apprehensions regarding the future of oil exploration in Colombia, thereby exerting downward pressure on Parex’s stock price. Parex reported a remarkable 44.5-per-cent EPS growth over the past year, alongside a 7.9-per-cent decline in its stock price, resulting in a modest 3.1 P/E ratio and a noteworthy 6.8-per-cent dividend yield.
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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Anthony Ménard, CFA