What are we looking for?
Small-cap value companies trading in Canada.
The screen
Small-cap stocks in Canada have suffered over the past 12 months as the S&P/TSX small-cap index has dropped more than 18 per cent over that period. Year to date however, this index has outperformed the S&P/TSX composite by about 1 per cent. Although volatility tends to be higher in this asset class, investors can find value. In fact, research by Eugene Fama and Kenneth French (founders of the Fama-French three-factor model – a highly regarded financial model studied in the theory of finance) shows that small-cap value stocks outperform markets repeatedly.
The screen identifies companies trading in Canada with a market capitalization between $400-million and $1-billion that:
- pay dividends;
- and have price-to-book and price-to-earnings ratios less than the industry median.
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What did we find?
The results identified 12 companies in Canada that meet the screen criteria. Sorting the list by year-to-date price performance in descending order, Valener Inc. tops the list. Valener, a Montreal-based energy company that focuses on the production, transportation, storage and distribution of energy, is up over 5 per cent this year and pays out a solid 5.5-per-cent dividend. With a beta of less than one, this company is also considered less risky than the market.
Valener announced first-quarter earnings on Feb. 12. Although it missed earnings-per-share estimates by 15 per cent, the company raised its dividend by 4 per cent and both net income and operating cash flows increased from the same quarter in the prior year. Valener chairman Pierre Monahan assured investors that the company is on track to raising its dividend over the next couple of years and its financial position remains strong because of stable and predictable cash flows.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Patrick Gattuso works in the financial and risk unit of Thomson Reuters and specializes in asset management.