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: Low Beta and 10-year total return. Combining two variables gave investors a decent list of companies with an attractive profile of risk-adjusted returns, meaning companies that achieved attractive returns with minimal volatility over the last decade. Although past returns do not mean future returns will be similar, we think winners will continue to win. By looking at the beta and total returns in the last ten years, investors could seek businesses that are potential candidates for high-quality, long-term holdings.

We have outlined a set of stocks below that we have identified as ‘outliers’ on the scatter plot and drew special notice to one major outlier. This green-shaded area indicates stocks that offer a combination of attractive return profiles and limited risk of volatility.

Let’s take a closer look at some of the stocks which encompass this section of the graph. We can see TMX Group Limited (X), Constellation Software (CSU), WSP Global (WSP), and Descartes Systems (DSG) are in this area. The common theme between these names is that the growth in their fundamentals, i.e. earnings, drives the share price returns over time, and companies with stable earnings and consistent execution also tend to have lower volatility in their share prices.

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

Constellation Software (CSU): CSU has been one of the best-performing stocks in the Canadian market in the last ten years. The company has demonstrated consistent execution as a serial acquirer of vertical market software assets year after year and managed to grow its topline by around 21% on average each year in the last ten years. CSU is a classic compounder that every investor should almost never sell.

TMX Group Limited (X): X operates as exchanges and clearinghouses for capital markets primarily in Canada. X has operated in a favourable market structure over the years as one of the primary exchanges in Canada. The company is trading at 25.2x Forward P/E and organic growth over the next few years is expected to be in the range of 7%.

WSP Global Inc. (WSP) WSP Global (WSP) is one of the world’s leading professional services firms, which has a team of global experts providing advisory services for engineering and design in various sectors. WSP has managed to compound capital at around 23% per year on average through its strategy of combining acquisitive and organic growth.

Descartes Systems (DSG) DSG is another successful case study of serial acquirers of software assets that has consistently rewarded long-term shareholders for patience. DSG compounded capital at around 25% on average in the last decade, which was supported by a decent growth in its fundamentals as 10-year revenue and EBITDA grew at 14% and 18%, respectively.

Dollarama (DOL): DOL is an above-average dollar store operator globally. The company consistently grew its topline over the years by double-digit organically while using the majority of the cash flow to repurchase shares aggressively. In contrast to US peers that struggling to grow and improve profitability. DOL continued to show solid same-store sales over time.

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 10-year total return and low beta. A common theme among the stocks we highlighted is these businesses possess strong earning growth profiles that are highly durable and stable across economic cycles. These companies are solid candidates for long-term holdings as they balance well between upside potential and downside protection. For other editions of our ‘Stock Teasers’, check out this latest blog on Stock Market Gems from /r/CanadianInvestor!

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