For the majority of the year, 2023 was a challenging year for equities due to macro uncertainties. However, things abruptly changed in November, as most indices experienced significant rallies in the last two months of the year due to expectations that inflation has peaked and Central Banks across developed countries will start cutting rates as early as March 2024, leading to strong overall returns in 2023 for market indexes.

However, there is a subset of companies that have been “beaten up” quite hard in 2023 and still have not recovered along with the market indexes, which is the case for a variety of different reasons. Firstly, liquidity tends to initially flow to large-cap companies in recovery due to their size and popularity. Secondly, some of these companies’ fundamentals have been negatively affected by the challenging macro environment in the last few years, leading to a decline in sales and profitability. The market is currently not pricing in the likelihood of a recovery in the near term for these aforementioned names. Thirdly, some companies are trading at historically low multiples relative to their valuation averages, as they have incurred structural changes which may have impaired either their growth prospects or fundamentals.

Below we have screened for companies with the following criteria:

• Market cap larger than $100 million
• Return on capital of at least 7%
• 1-year price change of at least -10%.

Here is the screener:

The criteria for the screener are quite simple as we review companies that are over $100 million in size since these companies have had decent operating track records for investors to evaluate. Secondly, we screen for companies with a Return on Capital (RoC) of at least 7%, and a 1-year price change of -10% or more, the idea is to screen for companies that are currently experiencing negative momentum in share price, but with decent fundamentals. 

However, investors need to be careful that, not every company that has had a decline in share price is an opportunity to buy. Most of the time, things are cheap in the market for a reason. Investors need to evaluate whether the reason is valid or not by assessing the issues these companies are experiencing that have led to weak sales and profitability. Investors also need to consider whether these issues are industry-wide and, therefore, temporary in nature or whether these are structural changes that fundamentally make these companies become less valuable franchises. 

The screener came up with 16 names, members will recognize some of the names that we hold in our Model Portfolios and coverage lists such as BRP Inc. (DOO), Andlauer Healthcare Group (AND), and Aritzia (ATZ). As a quick note, we intentionally exclude companies in the energy and mining sectors due to their cyclical nature. 

Again, these companies on the list are not recommendations but a starting point that helps investors generate potential investment ideas and strategies. Investors can view our previous screener blog here.

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Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in the securities mentioned.