What are we looking for?
Canadian stocks that combine attractive valuations with financial strength and solid underlying fundamentals.
Canadian-born investor David Dreman, a Winnipeg native and author of Contrarian Investment Strategies: The Psychological Edge, became known for buying fundamentally sound companies trading at relatively low valuations. He argued that investors often become too pessimistic about unpopular stocks and too optimistic about highly valued companies.
His approach centres on buying lower-P/E ratio stocks, where expectations may already be modest, giving them room to outperform if conditions improve. Our screen applies that value-oriented idea while adding our own quality filters, including Trading Central’s TC Quantamental Rating.
The screen
Using Trading Central Strategy Builder, we began by focusing on Canadian companies across all major sectors, with a minimum market capitalization of $1-billion to concentrate on larger, more established businesses.
To emphasize value, we required a trailing price-to-earnings ratio of 17 or less, focusing on companies trading at a discount to the broader Canadian market. For comparison, the S&P/TSX Composite Index currently trades at a P/E ratio of 18.59.
We also applied Trading Central’s Quantamental framework, a systematic 20-factor model combining valuation, growth, quality, momentum and income, requiring a rating of at least 50 out of 100. The same proprietary framework underpins the Solactive TC Quant CA 50 Index, tracked by the Trading Central Quant Canada 50 Equity Index ETF, which provides systematic exposure to the 50 highest-scoring Canadian companies.
To favour companies with more manageable leverage, we limited the debt-to-equity ratio to 1.
We required a dividend yield between 2 and 5 per cent. The minimum adds an income component, while the upper limit helps reduce exposure to unusually high-yielding stocks, where elevated yields may reflect greater business risk or share-price volatility.
We have also included 52-week and year-to-date price performance for reference.
More about Trading Central
Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indices, forex, options and commodities. Strategy Builder, our stock screener, is available through leading retail brokers in Canada and worldwide.
What we found
Topping our list is Suncor Energy Inc. (SU-T), with a TC Quantamental Rating of 63. The shares trade at 12.99 times trailing earnings, and offer a dividend yield of 2.47 per cent. Suncor has also shown considerable price strength, gaining 55.3 per cent year to date, and 70.6 per cent over the past 52 weeks.
Canadian Natural Resources Ltd. (CNQ-T) is the largest company on our list by market cap, at $139.77-billion. The oil and gas producer trades at 12.06 times trailing earnings, has a dividend yield of 3.69 per cent and a relatively low debt-to-equity ratio of 0.37. Its shares have gained 43.9 per cent year to date and 48.8 per cent over the past year.
Among the non-oil-and-gas names, Algoma Central Corp. (ALC-T) stands out. The Great Lakes and ocean shipping company has the lowest P/E ratio on our list at just 6.24, and a dividend yield of 4.71 per cent, while its shares have risen 38.7 per cent year to date and 51.3 per cent over the past year. The company recently announced a $1-a-share special dividend and raised its regular quarterly dividend by 48 per cent to 31 cents a share, following an increase in earnings.
Trading Central Strategy Builder provides a back-testing capability to evaluate how an investment strategy would have performed historically. Using a five-year historical period with quarterly rebalancing, the screen described above generated an annualized return of 17 per cent, compared with an annualized return of 12 per cent for the S&P/TSX Composite Index over the same period.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of investing in financial instruments. Investors should conduct further research before investing.
Gary Christie is head of North American research at Trading Central in Ottawa.