In this edition of ‘Stock Teasers’, we are going to be looking at Canadian stock outliers using a unique screener in each edition. The screeners have two main variables, of which will change each time, and the end goal is to find a group of stock outliers on the graph and identify why they might be outliers.

Canadian Stock Outlier Screener

We have used the following variables across the Canadian stock universe: percentile ranking for 10-year EBITDA margins and percentile ranking for 10-year forward EV/EBITDA valuations. Combining these two variables give investors a good idea of which stocks currently have EBITDA margins at the high-end of their 10-year historical ranges (90% to 100%) and also have an EV/EBITDA multiple at the high-end of their 10-year historical ranges (90% to 100%). By looking at companies that are at the high-end of their historical valuations, we find that this helps to screen for companies that investors are willing to pay a premium for – these are typically high-quality, well-run businesses that have a successful track record.

We have outlined a set of stocks below that we have identified as ‘outliers’ on the scatter plot. This green-shaded area indicates stocks that possess a combination of a high EBITDA margin relative to its 10-year history and a high forward EV/EBITDA valuation relative to its history.

Let’s take a closer look at some of the stocks which encompass this section of the graph. We will not dive into all of the names within the shaded area, however, several names stand out to us on this graph, including: GIB.A, STN, CLS, WSP, CSU, TRI, TIH, and ATS. These are names that we have been following at 5i Research and they are most well-known for their high-quality management teams, above-average historical price returns, and are typically industry leaders. The common theme between the names is that they currently have a high EBITDA margin relative to their historical averages and they are trading at a relatively high valuation, which implies that investors are willing to pay a premium for these high-quality names.

A brief commentary on recent performance and an overview of what these companies do that may be driving these outlier EBITDA margins and valuations:

CGI Inc. (GIB.A): GIB.A is one of the larger Canadian tech names, and it provides IT consulting solutions. It provides hybrid and cloud management and other services for the government, banking and capital markets, health, utility, oil and gas, manufacturing, and other industries. It has a planned investment of $1 billion over the next three years to support the expansion of its AI services and solutions. It trades at a reasonable valuation of 18.5X forward earnings, and forward earnings estimates call for margin expansion.

Celestica (CLS): CLS provides supply chain solutions through two segments: Advanced Technology Solutions, and Connectivity and Cloud Solutions. Its business has been benefiting from the AI boom, and the stock is up 72% on the year. We continue to like CLS for its attractive valuation and growth prospects.

Toromont Industries (TIH): TIH is one of the leaders in the specialized equipment rental and dealership industry. Its specialized types of equipment are widely used in a variety of industries including residential and commercial construction, mining, road building and other infrastructure-related activities. We like TIH for its strong management team, excellent capital allocation strategy, and its 35 years of consecutive dividend increases.

Common Theme Among Canadian Stock Outliers

We hope that readers enjoyed this edition of ‘Stock Teasers’ talking about some of the Canadian stock outliers for percentile ranking for 10-year EBITDA margins and percentile ranking for 10-year forward EV/EBITDA valuations. A common theme among the stocks we highlighted is a high-quality management team, strong fundamentals, and that a higher ‘price’ for a stock is not always a bad thing. If a stock is growing its fundamentals faster than its peers, often times it is deserving of its premium valuation, and this is usually associated with strong market returns. For other editions of our ‘Stock Teasers’, check out this latest blog on Stock Market Gems from /r/CanadianInvestor!

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