The Top 200 Canadian Stocks for 2018
This year marks the fourteenth anniversary edition of the Top 200. It's packed with all the facts, figures, and analysis that you've come to expect on the largest stocks in Canada. This year we've completed our move online and included a few extra features along the way. So grab yourself a pleasing beverage and settle in to learn about our new team of All-Star stocks, which sport strong growth and value characteristics.
We're pleased to say that our efforts have been highly profitable so far. Our All-Star stocks climbed by an average of 14.6% per year since we started in 2004, not including dividends. That assumes an equal dollar amount was put into each All-Star stock in the first year and rolled into the new All-Stars each year thereafter. By way of comparison, the S&P/TSX Composite (as represented by the XIC exchange traded fund) climbed by 4.8% per year over the same period. The All-Star stocks beat the market by an average of 9.8 percentage points per year.
The accompanying graph converts those percentages into more easily understandable dollar terms. If you had split $100,000 equally among the original All-Stars and moved into the new stocks each year, your portfolio would now be worth approximately $585,000. That's more than five times your original investment. Those who invested in the index fund turned their $100,000 initial investment into only about $184,000.
Last year proved to be a profitable one for the All-Stars, which gained 13.5% since last time. They beat the S&P/TSX Composite exchange traded fund by 6.4 percentage points, which climbed by 7.1% over the same period. (The return figures shown above do not include dividends and are even higher when they're included.)
It is important to point out that our method has had its ups and downs over the years. For instance, the market suffered from a crash of historic proportions in 2008 that saw the All-Stars lose almost 33% from November 2007 to November 2008. In addition, the All-Stars trailed the market in four of the last thirteen annual periods.
While we'd love to be able to say that market crashes and downturns are a thing of the past, seasoned investors know that every stock-picking method stumbles from time to time. We fully expect the All-Stars to trail the market, or even lose money, on occasion. In addition, some individual stocks will inevitably disappoint. While we do our best to avoid such situations, investors can't enjoy the market's rewards without taking on some risk.
The Top 200 evaluates the 200 largest companies in Canada (by revenue) using data from Bloomberg. (This year we also stuck to stocks with market capitalizations in excess of $100 million.) Each firm is graded in two fundamentally different ways. First we consider a stock's merit as a value investment and then we determine its appeal as a growth investment.
Our value and growth tests employ a bevy of detailed calculations that are based entirely on the numbers. Our gut feelings or intuitions about a company don't enter into it. But, at the end of the day, we sum up everything about a stock in two easy-to-understand grades with one for value and the other for growth.
The grades work just like they did when you were in school. The top of the class get As. Solid firms get Bs or Cs. Those that are lacking get Ds or even Fs. Stocks with good grades are deemed to be worthy of consideration while those at the bottom of the class should be treated with caution.
The select group of stocks that get at least one A and one B on the value and growth tests are teamed up in the All-Star list. But, before we reveal this year's top stocks, let's take a closer look at how the grades are awarded.
Value investors are bargain hunters at heart. They like solid stocks selling at low prices. That's why we prefer companies with low price-to-book-value ratios (P/B). This ratio compares a firm's market value to the amount of money that could be theoretically raised by selling its assets (at their balance-sheet values) and paying off its debts. A low-P/B ratio provides some assurance you're not paying much more for a company than its parts are worth. To get top marks for value, a stock must have a low price-to-book-value ratio compared to the market and also compared to its peers within the same industry.
We also track price-to-tangible-book-value ratios. Tangible book value is like regular book value, but it ignores intangible assets like goodwill. It's a more rigorous test of how much a company would be worth if it had to be liquidated.
Assets are one thing, but it's also important to examine a company's bottom line. We prefer profitable companies and award higher grades to firms with positive price-to-earnings ratios based on their earnings over the past 12 months. We also reward a company when analysts expect it to be profitable and have a positive P/E over the next year. (This number is known as the forward P/E ratio.)
Because we know investors like to rub more than a couple of nickels together, we award extra marks to firms that pay dividends. As it happens, dividend-payers have generally outperformed miserly firms that don't pay dividends.
For safety sake we also want to make sure a company hasn't loaded up on debt. That's why we award better grades to firms with low leverage ratios (defined as the ratio of assets to stockholder's equity) relative to their peers.
All of these factors are combined into a single value grade. Only 20 out of 200 stocks got an A this time around.
Growth investors love firms with increasing sales and earnings. That's why we award higher marks to companies that have achieved reasonable sales-per-share and earnings-per-share growth over the last three years. We also track each firm's growth in total assets over the last year to get a sense of the momentum in its business.
While fundamental growth is great, we like it when the market takes notice. That's why we give higher marks to stocks with solid returns over the past 12 months.
In addition, we want to make sure that companies use their capital wisely. To do so we track each stock's return on equity, which measures how much a firm is earning compared to the amount shareholders have invested. Return on equity is a measure of business quality and we give higher marks to those firms that outperform their peers.
We don't want to take on too much risk and weigh up each stock's price-to-sales ratio, which as you might expect, compares its price to its sales. We figure stocks with low-to-moderate ratios are reasonably priced while those with extreme ratios run the risk of collapsing.
We put all these factors together to determine each stock's growth grade. Only 20 out of the 200 got an A this year.
No stock made it to the very top of the class this year by earning both an A for value and an A for growth. But 14 firms made it into the All-Star team by earning at least one A and one B on our value and growth tests.
Half of this year's All-Stars were also on last year's All-Star team. We're pleased to say that all of the returnees generated big gains over the last 12 months with total returns ranging from a low of 17% to a high of 48%.
The first two returning team members are Power Corp of Canada (POW) and its subsidiary Power Financial (PWF). Both firms are based in Montreal, Quebec and have interests in insurance, money-management, and many other businesses. They also happen to pay generous dividend yields of 4.4% and 4.6% respectively.
Linamar (LNR) posted the best return of the returnees with a gain of 48% over the last 12 months. The auto-parts company makes its home in Guelph, Ontario and has seen its earnings-per-share zoom up by an average of 19% per year over the last three years.
A couple of life and health insurance companies made the grade both this year and last year. The first is Sun Life Financial (SLF), which makes its home in Toronto, Ontario and happens to be the largest of the All-Stars based on its $31 billion market capitalization. The second is Industrial Alliance Insurance (IAG), which is a slightly better bargain based on its book value multiple of 1.35. The later is based in Quebec City, Quebec.
On the materials side of the equation, Cascades (CAS) makes and markets packaging and tissue products using recycled fibers. The firm is based on Kingsey Falls, Quebec and its stock trades at 3 times earnings. But the firm's earnings are unusually high this year because it recently sold its stake in Boralex (BLX).
The last returnee is WestJet Airlines (WJA). The Calgary-based airline's stock soared 24% over the last 12 months but it still trades at less than 10 times forward earnings.
The seven newcomers include Magna International (MG), which is headquartered in Aurora, Ontario. The auto-parts firm trades at less than 10 times trailing earnings and 9 times forward earnings.
Cervus Equipment (CERV) is an equipment dealer with operations in Canada, Australia, and New Zealand that sells to agricultural, transportation, commercial, and industrial firms. The Calgary-based company is the smallest All-Star with a market capitalization of $229 million. It is also the cheapest relative to sales with a price-to-sales ratio of 0.19.
Genworth MI Canada (MIC) provides residential mortgage insurance and makes its home in Oakville, Ontario. The company would be tested - perhaps to the breaking point - should the Canadian real estate market suffer a severe meltdown. But it trades at 0.94 times book value and 7 times earnings, which indicates that it could do quite well in less apocalyptic scenarios.
Hudbay Minerals (HBM) is a large mining concern based in Toronto with operations across the Americas. The firm digs up copper, precious metals, and zinc. It boasts the largest 12-month total return of the All-Stars at 82% and the best average annual sales-per-share gain over the last three years at 24%.
Lassonde Industries (LAS.A) primarily produces fruit and vegetable beverages along with sauces and soups. It makes its home in Rougemont, Quebec and has grown smartly with average annual sales-per-share and earnings-per-share gains north of 10% over the last three years.
Magellan Aerospace (MAL) is based in Mississauga, Ontario and provides assemblies and systems to aircraft and engine manufacturers worldwide. It's a smaller firm with revenues of $986 million and trades at a modest 11 times earnings.
Montreal-based engineering firm WSP Global (WSP) rounds out this year's All-Star list. It operates out of more than 500 offices throughout the world and has seen its sales-per-share grow by an average of 18% annually over the last three years and its stock has climbed by 31% over the last 12 months.
Before dashing off to buy any stock, do your own due diligence. Make sure its situation hasn't changed in some important way. Read the latest press releases and regulatory filings. Scan newspaper stories and get up to speed on all the recent developments. (Take particular care when when buying or selling stocks that trade infrequently.) If you do, you'll be more likely to enjoy what the market has to offer.
First published in MoneySense magazine.
|Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...|