What are we looking for?
Canadian equities trading at attractive valuations relative to their sectors, and which have seen positive upward analyst revisions.
The screen
Using the Thomson Reuters StarMine quantitative models, I screened for companies with a market cap greater than $500-million that rank equal to or better than 80 per cent of securities in their industries across positive analyst revisions and sector-relative valuations.
StarMine's relative-valuation model combines six valuation ratios into a single measure – enterprise-value-to-sales; enterprise-value-to-EBITDA (earnings before interest, taxes, depreciation and amortization); price-to-earnings; price-to-operating-cash-flow; price-to-book; and dividend yield – to highlight the best value stocks.
Trailing and forward-looking multiples are used, where the distribution of weight is based on analysts' ability to accurately forecast multiples in question. Relative valuation accounts for sector-specific characteristics by comparing each company with its regional peers, thereby avoiding biases in our evaluation. For example, a large number of companies in the IT sector would appear expensive from a P/E perspective relative to all Canadian stocks.
The analyst-revision model is designed to predict future changes in analyst sentiment; it is based on the premise revisions occur in clusters, where past revisions by top-ranked analysts are highly predictive of future revisions by laggard analysts.
We look at revisions covering companies' preferred component, that is, their most relevant estimate measure (revenue, EBITDA, or earnings per share), allowing us to fine-tune the screen to company/sector-specific key drivers.
We screen for preferred earnings analyst revisions and sector-relative valuation scores greater than or equal to 80 (companies ranking equal to or better than 80 per cent of their peers across both measures).
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What did we find?
Eight companies match our criteria, with Manulife Financial leading the pack in terms of market capitalization. MFC is a holding company with operations in North America and Asia, offering financial-protection and wealth-management services to personal and business customers, as well as asset-management services to institutional clients. MFC's Asia segment growth has been particularly strong, where core earnings (excluding certain investment gains/losses) have grown 9 per cent year over year (versus 5 per cent and 6 per cent in Canada and the United States, respectively).
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Khaled Eniba works in the financial and risk unit of Thomson Reuters and specializes in banking and research.