What are we looking for?
The largest Canadian companies that are not currently part of the S&P/TSX composite index and may be subject to short-term price appreciation if they are eventually included.
The screen
The S&P/TSX composite is Canada's largest index and is currently composed of 240 of the largest companies ranked by market capitalization in Canada. Many portfolio managers choose to follow a passive investment style, where they are tasked to accurately replicate the returns generated by the overall index while maintaining as low a tracking error as possible.
This screen takes a look at the largest Canadian companies, as measured by a market cap, of at least $1-billion that are not currently included within the S&P/TSX composite, and highlights profitability and liquidity metrics for these companies. In theory, if any of these companies eventually were to be included in the index, they should experience short-term price appreciation on the assumption that many passive portfolio managers would purchase the equity of these companies to maintain course and accurately track the index. Complete S&P/TSX composite index inclusion criteria can be found here.
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What did we find?
Among the 12 companies that met our criteria, Hydro One stands out. With its IPO in November, the company has not yet met the inclusion criteria of having traded for at least six full calendar months, but it should be a sure candidate for joining the composite after meeting this minimum threshold. TransAlta Renewables is the most liquid security to make the screen and second-largest as ranked by market cap. While the company has seen a negative price return over the past 52 weeks, it posts strong profitability ratios as well as a healthy dividend yield of 7.8 per cent.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Ryan Gottschalk works in the financial and risk unit of Thomson Reuters and specializes in asset management.