What are we looking for?
Canadian precious metals and other mining companies positioned to leverage a weakening Canadian dollar and positive market sentiment toward the sector.
The screen
Coming off an 11-per-cent loss in 2015, the S&P/TSX composite index kicked off the new year with a 4.3-per-cent decline, joining most global equity markets as victims of Chinese market volatility. While the index suffered its worst start to the year since 1998, bullish sentiment toward gold drove the S&P/TSX precious metals index toward a 5.1-per-cent gain in its first week of January.
We look for potentially undervalued companies within the sector with strong balance sheets, high operating margins and upward price momentum using the following criteria:
- A medium-term price momentum equal to or greater than 85: This is a percentile ranking of North American stocks based on historical price performance that compares the 10-day average closing price to the average closing price over the past three months. (A score of 85 means that the security has better price momentum than 85 per cent of North American stocks.) This StarMine indicator is best used to identify stocks undergoing a trend reversal.
- A price-to-book value less than 2.5: This ratio compares a company's market value to its book value. A lower figure could mean the stock is undervalued.
- An EBITDA margin greater than 20 per cent: This is earnings before interest, taxes, depreciation and amortization as a percentage of revenues.
- Current ratio greater than one: This financial liquidity ratio measures a company's ability to pay its short-term obligations. A higher ratio suggests the company is better able to pay upcoming liabilities.
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What did we find?
Our screen yields 11 companies, the largest being Barrick Gold Corp. All of these stocks are trading below the average analyst price target. Six out of the 11 companies have enjoyed double-digit price appreciation over the past week to either potentially reverse a one-year downtrend, or, in the case of companies such as Semafo Inc., sustain positive momentum over the past 52 weeks.
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.