A few weeks ago, a 5i Research member had asked us to screen for the ‘perfect stock’: “Could you recommend some mid to large cap stocks with a good combination of metrics such as: high ROE, low debt, generates good free cash flow and has the ability to diversify globally. In other words the "perfect" stock”. While perfection is hard to achieve, we decided to try our best to screen for stocks that may meet the above criteria. The metrics used follow:
- Companies trading within Canada
- Market capitalization in excess of $350 million
- Five-year average return on equity greater than or equal to 10%
- Free cash flow per share yield of 5% or more
- Debt to equity ratio less than or equal to 35%
In an attempt to screen out some of the smaller, more volatile companies, we used a minimum market capitalization of $350 million. While we considered using a one-year ROE metric, we decided that longer term and consistent ROE would return companies that have a better ability to continually provide an attractive ROE in the future. The free cash flow yield based on estimates is intended to screen for companies that have strong cash flows relative to the price that is being paid for those cash flows. Finally, we tried to manage the balance sheet risk in the screen through a debt to equity ratio below 35%. The final requirement, global diversification, is the hardest one to screen for. We have highlighted some names that have more geographic diversification but the screen becomes too small when limiting it to stocks that have a global presence.
| Identifier | Company Name | ROE Common Equity %, 5 Yr Avg (FY0) |
Company Market Cap (CAD) |
Free Cash Flow Per Share Yield % (SmartEstimate ®) (FY1) |
Total Debt to Total Equity, Percent (FY0) |
| BNE.TO | Bonterra Energy Corp | 24.4% | 1,279,238,458.31 | 5.1% | 27.2% |
| CIX.TO | CI Financial Corp | 23.8% | 9,986,117,458.82 | 5.8% | 16.2% |
| CJRb.TO | Corus Entertainment Inc | 13.4% | 1,836,394,600.43 | 8.9% | 25.8% |
| FRC.TO | Canyon Services Group Inc | 15.7% | 466,209,125.30 | 83.6% | 1.9% |
| GBTa.TO | BMTC Group Inc | 32.4% | 699,966,660.13 | 6.7% | 0.0% |
| MG.TO | Magna International Inc | 15.9% | 27,463,154,940.75 | 6.6% | 11.9% |
| NSU.TO | Nevsun Resources Ltd | 16.6% | 886,615,477.34 | 14.4% | 0.0% |
| STN.TO | Stantec Inc | 14.7% | 3,042,909,110.18 | 6.1% | 5.2% |
| TSb.TO | Torstar Corp | 11.2% | 466,256,526.58 | 5.2% | 0.0% |
| WEF.TO | Western Forest Products Inc | 16.6% | 802,128,097.65 | 8.8% | 19.5% |
| WFT.TO | West Fraser Timber Co Ltd | 10.8% | 5,345,188,287.48 | 6.7% | 24.3% |
| WTE.TO | Westshore Terminals Investment Corp | 24.5% | 2,390,436,263.87 | 5.9% | 0.0% |
| XTC.TO | Exco Technologies Ltd | 14.3% | 620,706,341.57 | 6.6% | 11.5% |
| CDI.TO | CanElson Drilling Inc | 12.4% | 379,680,708.81 | 6.8% | 11.9% |
The screen returned 14 stocks, three of which are covered by 5i Research. In our view, there are two interesting results in this screen. The first is the appearance of Exco Technologies. This company seems to come up on every screen we do! The company seems to screen well no matter what type of investor you are. It is a company we cover at 5i Research and was a past top pick by us on BNN Market Call recently. The strong performance is certainly testament to strong metrics as seen through the stock filters. We also found it interesting that some oil services names made the list amidst the tough oil sector. The strong free cash flow and low debt will certainly help these types of names get through a lower oil price environment.
You can see the other filters that Exco appeared on here, here and here.
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Someone over the weekend made me aware of Convertible Debentures. I will have to do a bit more research on that. do any of the 12 company's above have them? If not what would be a good candidate? I am sure there is some Canadian holdings that would be a good qualifier.