What are we looking for?
Canadian energy stocks that are creating wealth for their shareholders.
The screen
The relative volatility of the energy sector, the second-largest in the S&P/TSX Composite Index after financials, can lead to some confusion among many investors. Today, I selected certain metrics that are paramount to the economic value-added approach, a method that will help investors recognize real value. We screened the S&P/TSX Energy sector for companies with the following qualities.
- A return on capital equal to or greater than the market average of 5 per cent;
- An economic performance index change greater than or equal to zero over 12 months. The EPI is the ratio of return on capital to cost of capital. It gives shareholders an idea of how much return is generated from each dollar spent;
- Positive change in economic value-added (EVA) over 12 and 24 months. This measures the momentum of the wealth-creating ability of the company. EVA is the net operating profit after tax, or NOPAT, minus capital charge (cost of capital times the amount of invested capital);
- A positive sales change over 12 months.
For informational purposes, we have also included recent stock price, dividend yield, one-year return and future-growth-value-to-market-value (FGV/MV) ratio. FGV/MV represents the proportion of the market value of the company that is made up of future growth expectations, rather than the actual profit generated. The higher the percentage, the higher the baked-in premium for expected growth and the higher the risk.
Please note that some ratios shown are based on an end-of-quarter reporting.
More about Inovester
Inovestor for Advisors is a research platform application based on the economic profit approach. It aids advisers in quickly identifying attractive investment opportunities and easily communicating them to their clients. In addition to providing detailed reports on more than 13,000 companies (Canadian stocks, U.S. stocks and American depositary receipts), Inovestor allows investors to create personalized filters and build custom portfolios.
What we found
Arranged by descending market capitalization, we came up with a list of 13 companies, most of which are trading at a premium. Keyera Corp., one of the largest midstream oil and gas operators in Canada, is one of only two companies on our list to show a higher EVA change over the past 12 months compared with the past 24 months, indicating improved efficiency in capital utilization. In addition, sales and the EPI grew sharply. Keyera is currently trading at a 36-per-cent premium, as shown by the FGV/MV metric.
Parkland Fuel Corp., a marketer of fuel and petroleum products, has encountered a large jump in intrinsic value caused by the increase in the return on capital and therefore, the EPI. Furthermore, price has followed suit over the past 12 months. The stock price increase is attractive since it is supported by a strong uptrend in EVA change. (Like Keyera, Parkland's EVA change was higher during the past 12 months versus the past 24 months.)
Contrarily, one of the few companies from our list that is trading at a discount and not paying any dividends is Parex Resources Inc., a firm focused on crude oil exploration, development and production in Colombia. Nonetheless, Parex has experienced the largest change in EPI. The stock seems to be undervalued since its price still hasn't reflected the entire impact of enhanced performance as indicated in the EVA and the EPI columns.
Readers are advised to conduct further research before investing in any of the securities shown here.
Noor Hussain is an account executive for Inovestor Inc.
Noor Hussain