What are we looking for?
Canadian stocks combining upward analyst revisions and attractive valuations within sectors that have historically outperformed the S&P/TSX composite index during the fourth quarter.
The screen
The S&P/TSX composite index's impressive performance this year has been mainly driven by outsized returns across the energy and materials sectors, which, together with financials, represent approximately 65 per cent of the S&P/TSX's market capitalization.
Following up on a previous Number Cruncher, we take a closer look at the four sectors that, on average, have outperformed the S&P/TSX during the fourth quarter over the past 15 years: financials, consumer staples, industrials and information technology.
Our criteria are as follows:
- An Analyst Revisions Model score (ranked out of 100) greater than 75: This StarMine model is designed to predict future changes in analyst sentiment; the rankings are based on the premise that revisions occur in clusters, where past revisions by top-ranked analysts are highly predictive of future revisions by laggard analysts.
- Price-earnings-to-growth (PEG) multiple lower than the composite index (1.20); PEG is P/E divided by the expected earnings growth rate over the next 12 months, which allows us to directly compare P/E multiples of companies with different growth prospects. A value stock with declining income may appear cheap when only historical earnings are considered, but PEG may tell us a different story.
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What did we find?
The screen highlights nine companies that fit our criteria. Air Canada trades at the lowest PEG ratio. Even with the recent runup in the stock price the company trades at an attractive multiple of 3.65 times forward P/E (not shown – table displays trailing P/E) versus U.S. peers' average of 8.40.
Air Canada has recently completed a $1.25-billion debt refinancing that has cut total debt by $355-million, reducing annual interest costs by around $60-million.
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.