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The Top 200 Canadian Stocks for 2017

I have fond memories of getting an Advent calendar each December. Every day I would carefully reveal the hidden pieces of chocolate behind the calendar's small doors in the run up to Christmas. The chocolates came in all sorts of different shapes and sizes and brought a little joy as winter set in.

The stock market acts something like a devilish version of the calendars because you don't really know what you're going to get from an investment. Even worse, while stocks can provide happiness, they can also cause indigestion.

We created the MoneySense Top 200 guide twelve years ago to help point you to the best Canadian stocks on offer. This year we crammed it full of just the sort of information investors love including our team of All-Star stocks, which highlight firms with the best growth and value characteristics.

We're pleased to say that our efforts have been highly profitable over the last twelve years. Our All-Star stocks climbed by an average of 14.7% per year since we started in 2004, not including dividends. That assumes an equal dollar amount was put into each All-Star stock in the first year and rolled into the new All-Stars each year thereafter. By way of comparison, the S&P/TSX Composite (as represented by the XIC exchange traded fund) climbed 4.6% per year over the same period. In other words, the All-Star stocks beat the market by an average of 10.1 percentage points per year.

If you had split $100,000 equally among the original All-Stars twelve years ago and moved into the new stocks each year, your portfolio would now be worth approximately $516,000. That's more than five times your original investment. Those who invested in the index fund turned their $100,000 initial investment into only about $172,000.

Last year proved to be a profitable one for the All-Stars, which gained 2.8% since last time. However, they trailed the S&P/TSX Composite exchange traded fund by 3.6 percentage points over the same period, which wasn't so pleasing. (All of the return figures shown above do not include dividends.)

It is important to point out that our method has had its ups and downs over the years. For instance, the market suffered from a crash of historic proportions in 2008 that saw the All-Stars lose almost 33% from November 2007 to November 2008. In addition, the All-Stars trailed the market in four of the last twelve annual periods.

While we'd love to be able to say that market crashes and downturns are a thing of the past, seasoned investors know that every stock-picking method stumbles from time to time. We fully expect the All-Stars to trail the market, or even lose money, on occasion. In addition, some individual stocks will inevitably disappoint. While we do our best to avoid such situations, investors can't enjoy the market's rewards without taking on some risk.

The Top 200 evaluates the 200 largest companies in Canada (by revenue) using data from Bloomberg. Each firm is graded in two fundamentally different ways. First we consider a stock's merit as a value investment and then we determine its appeal as a growth investment.

Our value and growth tests employ a bevy of detailed calculations that are based entirely on the numbers. Our feelings or intuitions about a company don't enter into it. But, at the end of the day, we sum up everything about a stock in two easy-to-understand grades with one for value and the other for growth.

The grades work just like they did when you were in school. The top of the class get As. Solid firms get Bs or Cs. Those that are lacking get Ds or even Fs. Stocks with good grades are deemed to be worthy of consideration while those at the bottom of the class should be treated with caution.

The select group of stocks that get at least one A and one B on the value and growth tests are teamed up in the All-Star list. But, before we reveal this year's top stocks, let's take a closer look at how the grades are granted.

Measuring Value

Value investors are bargain hunters at heart. They like solid stocks selling at low prices. That's why we prefer companies with low price-to-book-value ratios (P/B). This ratio compares a firm's market value to the amount of money that could be theoretically raised by selling its assets (at their balance-sheet values) and paying off its debts. A low-P/B ratio provides some assurance you're not paying much more for a company than its parts are worth. To get top marks for value, a stock must have a low price-to-book-value ratio compared to the market and also compared to its peers within the same industry.

We also track price-to-tangible-book-value ratios. Tangible book value is like regular book value, but it ignores intangible assets like goodwill. It's a more rigorous test of how much a company would be worth if it had to be sold for scrap.

Assets are one thing, but it's also important to examine a company's bottom line. We prefer profitable companies and award higher grades to firms with positive price-to-earnings ratios based on their earnings over the past 12 months. We also reward a company when analysts expect it to be profitable and have a positive P/E over the next year. (This number is known as the forward P/E ratio.)

Because we know investors like to rub more than a couple of pennies together, we award extra marks to firms that pay dividends. As it happens, dividend-payers have generally outperformed miserly firms that don't pay dividends.

For safety sake we also want to make sure a company hasn't loaded up on debt. That's why we award better grades to firms with low leverage ratios (defined as the ratio of assets to stockholder's equity) relative to their peers.

All of these factors are combined into a single value grade. Only 20 out of 200 stocks got an A this time around.

Value Team
AltaGas (ALA)
AutoCanada (ACQ)
Bank of Montreal (BMO)
Canadian Western Bank (CWB)
Capital Power (CPX)
Cervus Equipment (CVL)
DH (DH)
E-L Financial (ELF)
Fairfax Financial (FFH)
Genworth MI Canada (MIC)
Home Capital Group (HCG)
Industrial Alliance Insurance (IAG)
Linamar (LNR)
Martinrea International (MRE)
Power (POW)
Power Financial (PWF)
Sun Life Financial (SLF)
TransAlta (TA)
Transcontinental (TCL.A)
WestJet Airlines (WJA)


Grading Growth

Growth investors love firms with increasing sales and earnings. That's why we award higher marks to companies that have achieved reasonable sales-per-share and earnings-per-share growth over the last three years. We also track each firm's growth in total assets over the last year to get a sense of the momentum in its business.

While fundamental growth is great, we like it when the market takes notice. That's why we give higher marks to stocks with solid returns over the past year.

In addition, we want to make sure that companies use their capital wisely. To do so we track each stock's return on equity, which measures how much a firm is earning compared to the amount shareholders have invested. Return on equity is a measure of business quality and we give higher marks to those firms that outperform their peers.

Since no one wants to skate out onto thin ice, we weigh up each stock's price-to-sales ratio, which as you might expect, compares its price to its sales. We figure stocks with low-to-moderate ratios are reasonably priced while those with extreme ratios run the risk of collapsing.

We put all these factors together to determine each stock's growth grade. Only 20 out of the 200 got an A this year.

Growth Team
AGT Food & Ingredients (AGT)
CAE (CAE)
Canadian Tire (CTC.A)
Cascades (CAS)
CGI Group (GIB.A)
Enbridge (ENB)
Fairfax Financial (FFH)
Fortis (FTS)
Great-West Lifeco (GWO)
Indigo Books & Music (IDG)
Lassonde Industries (LAS.A)
Leon's Furniture (LNF)
MacDonald Dettwiler (MDA)
New Flyer Industries (NFI)
Premium Brands (PBH)
Richelieu Hardware (RCH)
Saputo (SAP)
SNC-Lavalin (SNC)
Toromont Industries (TIH)
TransForce (TFI)


The All-Stars

Only one stock made it to the very top of the class this year by earning both an A for value and an A for growth. The coveted double-A prize went to Toronto-based Fairfax Financial (FFH). The insurance-based conglomerate is run by value investor Prem Watsa in a style similar to his hero Warren Buffett's Berkshire Hathaway. As it happens, Berkshire Hathaway is on the U.S. All-Star list this year and I own shares of both firms.

The other 13 members of the All-Star team earned at least one A and one B on our value and growth tests. The team is larger than usual this year and we hope that's a sign that the Canadian market isn't over extended.

Five of this year's All-Stars, including Fairfax, were also on the All-Star team last year. Two of the returning team members are Power Corp of Canada (POW) and its subsidiary Power Financial (PWF). Both firms are based in Montr al and have interests in insurance, money-management, and a slew of other businesses. They also happen to pay generous dividend yields of 4.7% and 5.0% respectively and I own shares of both. Fortis (FTS) was the next company to make the team again. It's an electric and gas utility based in St. John's, Newfoundland that recently made a splash by buying U.S.-based ITC Holdings. The last returning team member is auto parts firm Linamar (LNR), which makes its home in Guelph, Ontario. The company's sales and earnings have been zooming ahead at a ferocious clip over the last three years.

The new members of the All-Star team include two well-known Toronto-based retailers that attract holiday shoppers to stores across the country. They are Indigo Books & Music (IDG) and Canadian Tire (CTC.A). The former has, against the expectations of many, survived the digital revolution and chalked up an impressive 53% total return over the last year. The latter is a staple for handymen across the nation and its stock has rebounded nicely from its lows in 2009.

Two life and health insurance companies also made the grade. The first is Sun Life Financial (SLF), which makes its home in Toronto. The second is Industrial Alliance Insurance (IAG), which is based in Quebec City.

They're joined by mortgage provider Home Capital Group (HCG), which hails from Toronto. Savers might know it better for the high interest savings accounts offered by its Oaken Financial brand. The stock trades at just 6 times earnings due to worries that the company might be hard pressed should the Canadian real estate market tumble. (As with all deposit accounts, wise investors make sure their savings are fully insured by the Canada Deposit Insurance Corporation.)

On the materials side of the equation, Cascades (CAS) makes and markets packaging and tissue products using recycled fibers. The firm is based on Kingsey Falls, Quebec and its stock trades near a 52-week high. Martinrea International (MRE), from Vaughan Ontario, makes steel and aluminum parts primarily for the automotive sector.

TransForce (TFI) helps to move materials by truck in North America and is headquartered in Montreal. It's stock trades at 4 times earnings thanks, in part, to the sale of its waste management segment last spring. Last but not least, WestJet Airlines (WJA) takes to the skies and hails from Calgary.

Before dashing off to buy any stock, do your own due diligence. Make sure its situation hasn't changed in some important way. Read the latest press releases and regulatory filings. Scan newspaper stories and get up to speed on all the recent developments. (Take particular care when when buying or selling stocks that trade infrequently.) If you do, you'll be more likely to enjoy what the market has to offer.

All-Star list
Canadian Tire (CTC.A)
Cascades (CAS)
Fairfax Financial (FFH)
Fortis (FTS)
Home Capital Group (HCG)
Indigo Books & Music (IDG)
Industrial Alliance Insurance (IAG)
Linamar (LNR)
Martinrea International (MRE)
Power (POW)
Power Financial (PWF)
Sun Life Financial (SLF)
TransForce (TFI)
WestJet Airlines (WJA)




First published in the December 2016 edition of MoneySense magazine.

Added:

Performance
YearCapital gain
2005-2006+57.6%
2006-2007+37.6%
2007-2008+16.2%
2008-2009-32.9%
2009-2010+41.0%
2010-2011+19.7%
2011-2012-4.2%
2012-2013+13.4%
2013-2014+55.0%
2014-2015+2.3%
2015-2016+2.1%
2016-2017+2.8%


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