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What are we looking for?

Canadian equities trading at attractive valuations relative to their sectors, and which have seen positive analyst revisions.

The screen

Using the Thomson Reuters StarMine quantitative models, I screened for companies with a market cap greater than $500-million that rank better than most securities in their industries in terms of both positive analyst revisions and sector-relative valuation.

StarMine's Relative Valuation model combines six valuation ratios into a single measure – enterprise-value-to-sales; enterprise-value-to-EBITDA (earnings before interest, taxes, depreciation and amortization); price-to-earnings; price-to-operating-cash-flow; price-to-book; and dividend yield – to highlight the best value stocks. Trailing and forward-looking multiples are used, where the distribution of weight is based on analysts' ability to forecast multiples in question. The Relative Valuation model accounts for sector-specific characteristics by comparing each company with its peers, thereby avoiding biases in our evaluation. For example, many companies in the information technology sector may appear expensive from a price-to-earnings perspective if compared with all Canadian stocks.

The Analyst Revision model is designed to predict future changes in analyst sentiment; it is based on the premise that revisions occur in clusters, where past revisions by top-ranked analysts are highly predictive of future revisions by laggard analysts. We look at revisions covering companies' preferred component, that is, their most relevant estimate measure (revenue, EBITDA, or earning per share), allowing us to fine-tune the screen to company/sector specific key drivers.

We screen for preferred earnings analyst revisions and sector relative valuation scores greater than or equal to 80 (companies ranking better than at least 80 per cent of their peers across both measures).

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What did we find?

Ten companies, ranked in the accompanying table by market cap, match our criteria. WestJet Airlines Ltd. has recently hit a two-year high after reporting its highest-ever figures for both quarterly load factor (a measure of capacity utilization) and number of customers flown. This was reflected in analysts raising their price targets ahead of the next quarterly results. WestJet has a number of continuing initiatives including the launch of ultralow-cost carrier Swoop, which the company says will begin selling flights in early 2018.

This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.

Khaled Eniba works in the financial and risk unit of Thomson Reuters and specializes in banking and research.

Canadian value stocks

CompanyTickerSectorMarket Cap. ($Mil)Rel. Value Sector RankAnalyst Rev. Model Pfd Earns. RankP/EDividend Yield
Empire Co. Ltd.EMP.A-TCons. Staples6,126869741.71.9%
Norbord Inc.OSB-TMaterials4,280929613.24.0%
WestJet Airlines Ltd.WJA-TIndustrials3,186978712.22.0%
Transcontinental Inc.TCL.A-TIndustrials2,059998010.53.0%
Dream Global REITDRG.UN-TReal Estate1,943978317.27.2%
Russel Metals Inc.RUS-TIndustrials1,730938317.35.4%
Labrador Iron Ore Royalty Corp.LIF-TMaterials1,337859610.04.8%
Cogeco Inc.CGO-TCons. Disc.1,198859011.71.7%
Canfor Pulp Products Inc.CFX-TMaterials923838712.21.8%
STEP Energy Services Ltd.STEP-TEnergy6699799n/an/a

Source: Thomson Reuters Eikon