The waiting is finally over.
I invite fellow investors to dig into Report on Business magazine’s Top 1000 guide to Canadian companies (distributed to Globe and Mail subscribers this past Friday and found online at tgam.ca/top1000). It contains detailed data on the largest 1,000 firms in the land and comes with a star system that ranks stocks based on their attractiveness as potential value and momentum investments. Firms with the best characteristics make it into the 20-stock team of Megastars.
This year marks the third anniversary of our star system. It started on a strong note with the Megastar team gaining an average of 16.2 per cent in its first outing, including reinvested dividends. By way of comparison, the Canadian stock market – as represented by the S&P/TSX Composite Total Return Index – climbed 2.6 per cent over the same period. But the wheel of fortune turned last year when the team gave up its earlier gains. The average Megastar stock fell by 16.5 per cent last year and the market index climbed 5.9 per cent.
While we warned that the star system would likely encounter good and bad periods, they don’t usually arrive back-to-back like clockwork. But we do believe the system will fare well over the long term because it merges two core schools of investing. It combines the value characteristics loved by bargain hunters with the trend-following techniques favoured by momentum investors. In essence, it looks for cheap companies on the upswing. The combination has been highly profitable over the course of many decades.
When it comes to value, our system prefers stocks that trade at low prices relative to their earnings, cash flows and sales. It also favours stocks with nice dividend yields and hefty share buyback programs. On the momentum side of the ledger, it seek stocks with good relative returns over the past year because stocks in an uptrend often continue to perform well.
Read all about the star system in ROB magazine. Or head online where you’ll find the full Top 1000 list. It includes this year’s team of Megastars, a wealth of data on each of the largest 1,000 stocks in Canada and other important notes. But before you go, here’s a peek at a couple of this year’s returning Megastar stocks.
Air Canada (AC-T) runs the largest airline in the land from its headquarters in Montreal and flies customers to more than 220 destinations on six continents. It returned to our Megastar team this year, which marks the third year in a row for the company. As of this week, its stock is up 99 per cent since it first became a Megastar. It climbed 24 per cent over the past 12 months alone. Air Canada currently trades at nine times forward earnings based on industry analyst estimates. Let’s hope it will continue to soar higher well into 2020.
Magna International (MG-T) is another three-time Megastar stock. The auto-parts maker based in Aurora, Ont., is, as of this week, up 40 per cent over the past three years, including reinvested dividends. Magna grew its sales by 11 per cent and its earnings by 5 per cent over the past four quarters while trading at just eight times earnings. It also managed to reduce its share count by 9 per cent over the same period. If the economy fares well, it stands a good chance of continuing to motor higher.
Find out more about both firms in the magazine, or online, because they offer a taste of what we’re looking for. They’re relative bargains with low ratios that have grabbed the market’s attention. We have high hopes for their prospects this year.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.