When trying to pick stocks worth buying at current prices, we follow a different route from the riskier high volatility, high payoff stocks that are evidently the standard for the Superstars whose generally disappointing performance we reviewed last week.
Instead, we look for dependable performers in the mainstream TSX Composite index, combining stocks with:
A) traditional measures of value, such as
- a Price to Earnings ratio, lower than the overall market, currently 15.1 for the TSX
- high and consistent profitability, seen in Return On Equity (ROE)
- growing dividends in excess of the market average, that can be sustained as shown by Payout Ratio (dividends as percentage of earnings)
- we supplement this with BMO InvestorLine's automated Recognia assessment tool (available only to BMOIL clients) based on value investing principles to see whether it says the stock is under-valued, fair value or over-valued.
B) less commonly used measures that research suggests lead to better performance, such as
- presence of women on the board of directors, (data collected from Sedar's search tool by downloading each company's latest Proxy Circular)
- low dispersion of analysts' future Earnings Per Share estimates, (compiled from a combination of Yahoo Finance Canada e.g. here for Royal Bank of Canada, and BMO InvestorLine client-only stock research)
- low volatility of market price, (extracted by entering stock symbols in Globe Investor's My WatchList tool)
- companies with good ratings for social & environmental responsibility (SRI/ESG) if possible, though not all in our results table achieve that (based on membership in iShares Jantzi Social Index Fund - symbol XEN)
- governance ratings in the top half of companies , which means a rating of 69/100 and above (data from Globe and Mail Corporate Governance Board Games 2012)
- insider activity (data from TD Waterhouse client only stock research)
Fourteen stocks met our criteria. The banks dominate the comparison table below with six out of fourteen spots, with a scattering amongst other sectors. No utilities made the grade, due to their high P/Es. The mining sector is absent too, due to falling commodity prices and earnings that create high price volatility.
The surprising result is that almost all of the picks have seen insider executives and directors mainly selling shares in the past year. Whether that is merely cashing in to diversify wealth or to spend (several of the banks look like that), as opposed to a bet on the company's stock value, surely differs from one company to another. Imperial Oil is the only company with positives in every category. Even then, success is not 100% assured since, as we all know and should remember, the future may not be like the past and a highly successful company may begin to falter due to its own actions or simply changes to competitive or economic conditions. It is easily possible to find warning commentary about banks, energy companies, REITs, telecoms etc. Nevertheless we feel that on average these stocks should perform better than the overall TSX.
Disclaimer: this post is my
opinion only and should not be construed as investment advice. Readers
should be aware that the above comparisons are not an investment
recommendation. They rest on other sources, whose accuracy is not
guaranteed and the article may not interpret such results correctly. Do
your homework before making any decisions and consider consulting a