What are we looking for?
Companies that have better cash flow momentum than their peers in the sector, while continuing to generate strong long-term profitability and stable earnings.
In Canada, short-term interest rates are falling while longer-term rates remain higher. This steepening of the yield curve usually reflects expectations that economic conditions could improve over time, even if the near-term backdrop remains mixed. In this environment, investors often broaden their focus beyond the safest defensive stocks and toward companies with strong fundamentals and positive momentum. Businesses that are improving relative to their sector peers while maintaining solid profitability may be better positioned to benefit as investor confidence shifts toward higher-quality companies with sustained execution.
The screen
We screened Canadian stock universe in the top 25th percentile using the following criteria:
- market capitalization greater than $2-billion;
- positive three-month earnings estimate revision;
- positive industry-relative quarterly cash flow momentum to ensure cash generation is improving faster than that of other companies in the sector;
- co-efficient of variation below 10 ensures analysts are relatively aligned on the earnings outlook, suggesting stronger consensus and lower uncertainty;
- average return-on-equity (ROE) over the past 10 years greater than 15 per cent.
For informational purposes, we also added dividend yield, the enterprise value-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio (EV/EBITDA) and one-year price change.
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What we found
Canadian Imperial Bank of Commerce CM-T, one of the big banks, has the strongest industry-relative cash flow momentum of 13.6 per cent, while maintaining a 10-year average ROE of 15.6 per cent. CIBC offers a dividend yield of 2.9 per cent and has shown a strong price return of 79.1 per cent in the last year, strengthening its appeal for investors who are looking for a stable large-cap company with strong cash generation.
Aritzia Inc. ATZ-T designs, develops, and sells apparel and accessories for women. ATZ has the lowest earnings estimate variability at 2.6 per cent, reflecting the strongest level of analyst consensus among the companies screened. The company ranks second in our screen with industry-relative cash flow momentum of 9.1 per cent and a 10-year average ROE of 28.8 per cent. Therefore, Aritzia is a strong opportunity for investors who are seeking a high-momentum company with strong profitability.
Toromont Industries Ltd. TIH-T provides specialized capital equipment and ranks third on our screen, with industry-relative cash flow momentum of 8.1 per cent. The company trades at 17 times EV/EBITDA, a more moderate valuation than some higher-multiple names in our screen. With a one-year share price gain of 80.9 per cent and a 10-year average ROE of 18.1 per cent, Toromont provides a great opportunity for QARP (Quality at a Reasonable Price) investors who are seeking a company with solid profitability, price momentum and a more balanced profile.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
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Anuj Anand, MBA, LLM is an investment analyst at Inovestor.