The Canadian stock market suffered in the early part of the year but it is springing forward as the weather heats up. The bullish move prompted me to check in on my recently drafted team of megastar stocks. It’s still early days, but they’re off to a good start.
The megastars are an elite segment of Report on Business Magazine’s Top 1000 list of the largest companies in Canada, which you can explore here. Just 20 stocks with the best value and momentum characteristics, as measured by a variety of quantitative tests, made it into this year’s megastar roster.
The team is out to an early lead with average gains of 4.9 per cent from March 9 to May 15. The S&P/TSX Composite Total Return Index (a reasonable proxy for the Canadian stock market) trailed with gains of 3.9 per cent over the same period. The early move builds on the market-beating 16.2-per-cent returns generated by last year’s megastars.
While it’s nice to see the megastars starting on the right foot, let me be the first to say that short-term returns contain a great deal of noise and should be taken with a big grain of salt.
Of the current megastars, Canfor Pulp Products Inc. (CFX) caught my attention owing to its astonishing advance over the past few weeks. Its stock is up 30 per cent since March, when it returned to the megastar team for the second year in a row. The Vancouver-based pulp and paper company is up a whopping 85 per cent since it first became a megastar last year.
Canfor Pulp was spun out of its parent Canfor (CFP) in 2006 as an income trust that was subsequently converted into a corporation at the start of 2011. Today, Canfor has a 55-per-cent interest in Canfor Pulp. Its proportional interest climbed over the past five calendar years because of a series of share repurchases by Canfor Pulp that saw its share count fall by a total of 8.4 per cent.
While Canfor Pulp’s business is prone to cyclical swings, the company managed to turn a profit in each calendar year (both as a corporation and income trust) going back to 2006. It’s an enviable track record given the nature of the pulp and paper business. Nonetheless, there have been a few bumps along the way.
To get a sense of the ride, in 2012 the firm earned $9.1-million and its stock traded at a low of $7.60 per share. It returned to health by 2015 when the firm earned $106.6-million and its stock traded at a high of $17.02. But profits declined to $57.8-million in 2016 when shares traded at a low of $9.05. Since then happier times have returned with the firm earning $142.3-million over the past four quarters and it posted a profit of $64.3-million its latest quarter. In response, Canfor Pulp’s stock shot up and hit the $22 mark in recent days.
The stock-price gains of the past few months make Canfor Pulp a strong momentum candidate. But its past volatility also offers a cautionary note. There is a chance that its shares could fall precipitously on bad news or earnings weakness as they have in the past.
On the value front, the company still trades at a reasonable price-to-earnings ratio of 10 thanks to its climbing earnings, which helped to offset its higher share price. Taking a longer view, it trades at 18 times average earnings over the past five fiscal years, which is somewhat less encouraging.
Over all, Canfor Pulp is now more of a momentum stock than value stock. But momentum stocks have a habit of surprising to the upside and we can hope Canfor Pulp will grow a little more over the next few months.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.
Norman Rothery