Kelly Brown is an investment analyst at Longview Asset Management Ltd. in Toronto.
What are we looking for?
Companies in Canada available at a low multiple of price-to-trailing-earnings (P/E).
Independent studies have demonstrated that selecting companies based on a value metric such as a low P/E will result in a portfolio that is likely to outperform the market averages over the next 12 months.
A low P/E can sometimes signify slow earnings growth or a balance sheet with too much debt – so we also filter out companies with these characteristics.
The screen
Before ranking companies by lowest P/E, my colleague Alvin Lau and I used the S&P Capital IQ Screener to exclude companies with:
- compound earnings growth of less than 5 per cent per annum for the last five years;
- a balance sheet with greater than 30 per cent debt to total capital;
- a market capitalization lower than $100-million.
More about S&P Capital IQ
S&P Capital IQ offers a comprehensive set of tools for fundamental analysis of global securities as well as idea generation and work flow management. Its Web- and Excel-based platform provides access to both real-time and historical information on companies, markets, transactions and people around the world.
What did we find?
Successful investors use a variety of tools to identify companies that are high quality and trade at attractive prices. This particular screen produced 40 results, from which we selected the top quartile based on a low P/E ratio. All companies in this quartile have a P/E of less than 13. The average five-year earnings-per-share (EPS) growth rate is 14.9 per cent per annum. The average debt-to-total capital is 16.1 per cent.
Of course, none of these companies is guaranteed to outperform, but screens such as this can be a useful tool for improving your chances of beating the relevant index. Investors should perform additional research before making an investment.