For this month’s 5i Filter, we wanted to consider companies that may be lesser known, and in turn, flying under an investor’s radar. The simplest way to do this was to control for analyst coverage. Typically, the fewer analysts covering a stock, the less known the company is. Further, with less individuals performing an analysis on a company, there is a greater chance that a company will surprise to the upside and beat expectations. Since you have less people spending day and night reading the financials, there is a higher chance of estimates varying widely from actual results and less of an ability for an analyst to ‘anchor’ their estimates to what the general consensus is saying. Because of this lack of an ability to anchor the estimates, analysts are much more likely to remain conservative, so to not put their neck on the line. Naturally, this sets a company up for outperformance and also helps to keep valuations in check as high expectations have not yet started to be embedded in the stock valuation. We think this is a great area for investors to look for opportunities as these can be stocks that are getting some attention from analysts but have yet to really catch the markets attention. This provides an opportunity to gain exposure before expectations build and the larger market gains interest. There are, however, higher risks with this type of strategy as the chances of something being missed by an analyst are higher, simply because there are less individuals looking at the company. In order to control for these risks we wanted to consider only companies with low debt, a minimum market-cap of $100 million, and a bit of a dividend. The low debt should help to reduce risk if the company hits a rough patch while the dividend helps to provide comfort that the company should be seeing some success as they are able to place money directly in your bank account. Finally, the market-cap metric helps to filter out some of the more speculative, high risk names. The metrics are not a perfect way to filter out the bad eggs, but it is a start in order to find a few companies that may be of interest.

The filter returned 20 results from the following criteria:

• Less than or equal to 5 analysts
• Market-cap greater than or equal to $100 million
• Debt to equity ratio of less than or equal to 0.25
• Dividend yield greater than 0.3%
• Traded in Canada

Between a strong balance sheet, dividends and less known but strong Canadian companies, many of the results are names that are covered at 5i Research. Exco Technologies was a recent ‘top pick’ by Peter Hodson on BNNs Market Call which can be viewed here. Enghouse (ESL) and Sylogist (SYZ) are other names that we have found interesting for quite some time. On the other hand, there are a few companies that we think do not have much going for them and some with very low trading liquidity, so investors need to be aware of the risks!