STOCK SCREENING CAN HELP YOU DISCOVER SOME INTRIGUING PICKS
There are many cheap, quality companies out there if you look, Peter Hodson writes.
Many investors like us use stock screens to search out good investment ideas. With tens of thousands of stocks to choose from in North America alone, screening can certainly save time for investors looking for new winners. Our customers at 5i Research often ask us to run screens for them, and even we are sometimes surprised by what pops out.
In our column here in May, we provided some of our favourite screening criteria. We are going to take this a little further this time, providing five specific screens and the best stock choices that result from our analysis. Keep in mind that stock screening does have some disadvantages: The data output is only as good as the data input. Bloomberg (which we will use for these screens) is generally very accurate, but is not perfect. Second, screening will not capture subjective qualities in a company, nor will it spot emerging small companies (such as those with no revenue or earnings yet). Still, screening can often provide some great investment ideas, and highlight some stocks you may have never heard of. Here goes:
HIGH DIVIDENDS
For this screen, we are going to look only at dividend yield. We are not going to screen for debt, cash flow or dividend risk, so take that under advisement.
Generally, high dividends mean extra high risk, but — once in a while — it presents an opportunity. We have used a minimum market cap of $500 million here to screen out the riskier, smaller companies. Some of the companies that qualified had high yields because they had paid special dividends, so we moved them out.
At the top of the list of this screen then were Atrium Mortgage (AI/TSX) at 6.5 per cent yield, Chemtrade Logistics (CHE. UN) at 11.4 per cent and Vermilion Energy (VET) at 13.6 per cent.
RETURN ON EQUITY
In May, we highlighted how this is one of our all-time favourite indicators to find quality companies. For this screen, we will lower our market cap restriction to $250 million, and run that with return on equity as the only other screen. We used an incredibly high 40-per-cent return on equity screen, and still got 13 companies, including Wall Financial (WFC), Onex Corp. (ONEX), Constellation Software (CSU) and Canada Goose (GOOS).
HIGH YIELD AND NO DEBT
Today, it seems, many investors are quite worried about dividend sustainability. So, to screen for some dividend stocks, we have added companies with little or no debt (screen less than $25 million) to the earlier screen for high yield. Having little debt in no way guarantees that a company will keep paying its dividend, but it certainly helps the company’s financial flexibility. We have kept the screen for companies with greater than $500 million market capitalization.
Three stocks met these criteria, with yields of more than four per cent: Prairiesky Royalty (PSK/ TSX), with a 5.1-per-cent yield, Pason Systems (PSI) at 4.8 per cent and Labrador Iron Ore Royalty (LIF) at 4.4 per cent, or 13.6 per cent including some allowance for recent special dividends declared.
VALUATION AND GROWTH
There are many cheap stocks out there, and there are many growth stocks. Generally, high growth comes at a cost of higher valuation. So, we thought we would screen to see a list of companies that are cheap, and still are showing growth.
For our growth screen, we used earnings growth (one year per share) of more than 30 per cent. For valuation, price-to-earnings of less than 10. We added a $400-million market cap but no other criteria, such as debt or cash flow. We are only interested in growth here. We got 13 companies, but many were energy stocks so we took those out. The remainder was an interesting group: Chorus Aviation (CHR), Enerflex (EFX) and Canaccord Genuity (CF).
SETTING THE BAR HIGH
For our final screen, we thought we would throw in a lot of qualifications, just to see what pops up when we set a really high criteria bar. Here, we screened for low valuation (less than 15 times price/earnings), dividend growth (greater than five per cent), sales growth (greater than 10 per cent), earnings growth (greater than 10 per cent), and decent return on equity (greater than 10 per cent) with a market cap restriction (greater than $500 million). As expected, not many companies qualify with such restrictions. But goeasy (GSY), Canadian Western Bank (CWB), Equitable Group (EQB), Manulife (MLF), IA Financial (IAG) and Enerflex all still made this list.