Skip to main content
number cruncher

What are we looking for?

As the earnings cycle moves past its recovery mode and into a more mature stage, investors will no longer be able to count on wide swaths of the market moving in one direction (upward) almost in unison. Many analysts believe that a key investing theme in this next stage of generally moderating earnings growth will be stock selection - identifying companies whose superior quality positions them to outperform their industry peers.

To get at this, UBS Securities Canada Inc. has applied a "quality" screen to the Canadian equity market in an attempt to identify the best-quality stock in each of the 10 major sectors.

UBS Canadian 'quality' stock screen

"Our latest bottom-up earnings [forecast]for the TSX sees growth at 27 per cent this year, but just 6 per cent in 2012," strategists George Vasic and Garry Cooper wrote in their recent report on the topic. "Accordingly, we expect performance to transition from high-beta earnings momentum plays to 'quality' stocks as the underlying landscape shifts."

UBS's Quality screen uses 12 wide-ranging metrics that, taken together, it believes measure the overall quality of stocks. (Many of the key metrics are in the accompanying table.) The criteria fall into four broad categories:

-Valuation - Price-to-earnings, price-to-book-value, return on equity;

-Leverage - debt-to-capital, interest coverage;

-Growth - of net income, free cash flow, EBITDA;

-Dividends - growth, yield, true yield, payout ratio.

UBS applied the screen to the stocks on the S&P/TSX composite index, and came up with a list of 10 stocks - one for each of the major industry sectors - that had the highest combined score across all the criteria, relative to the other stocks in its industry.

What did we find?

The UBS strategists noted that their resulting list of 10 sector quality leaders "appears to underscore the themes we are recommending on a bottom-up basis as well."

UBS already had "buy" recommendations on eight of the 10 stocks (the exceptions are Research In Motion and Fortis, on which it has "neutral" recommendations). Three of the names (Suncor, Royal Bank, First Quantum) are on its "key calls" list - the five-stock list of UBS's highest-conviction Canadian stock picks.

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe