Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients. michael@wickhaminvestments.com
What are we looking for?
Companies that have a history of creating profit.
The screen
My colleague Rob Belanger and I started with Canadian companies that have a market capitalization greater than $500-million.
Return on equity (ROE) shows whether a company is a profit creator or a profit burner, and if it is growing profit without pouring new capital into the business. It indicates how much profit the company generates with the money shareholders have invested. Firms that do a good job of milking profit from their operations typically have a competitive advantage that can translate into superior returns for investors.
The companies on our list had to have an average ROE greater than 15 per cent for each of the past four, eight and 12 quarters.
Price to cash flow (P/CF) values a stock price relative to how much cash flow the company is generating. A high P/CF indicates a company is trading at a high price, but may not be generating enough cash flow to support the multiple. We are looking for a low number.
The price to earnings ratio is the market value per share divided by the earnings per share. This metric has been used for more than 100 years in security analysis and still remains one of the most relevant pieces of stock valuations. Ideally we are looking for a low number.
What did we find?
Ten of our 23 companies have grown their ROE in each of the three reporting periods.
The financial sector is represented by wealth manager Gluskin Sheff and mutual fund company CI Financial.
In the food industry, we have grocer Metro Inc., fast food retailer MTY Group, and dairy processor Saputo.
Toromont Industries, based in Concord, Ont., operates one of the world's largest Caterpillar dealers.
Retailers Dollarama and North West Co. both make the cut.
Health science company Nordion and oil producer Baytex round out the list of stocks showing consistent ROE growth over each period.
Even though a steadily increasing ROE is a hint that management is giving shareholders more for their money, investors should still conduct further research or contact an investment professional.