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: Return on Capital (ROC) in the most recent fiscal year and 5-year EBIT CAGR. Combining two variables gave investors a decent economic picture of how fast companies grew their earnings while balancing with a high return on capital employed, which is a strong signal for great capital allocation policies. One of the hallmarks of a great business is a high return on capital profile, and by looking at the compounded annual growth rate (CAGR) in earnings before taxes (EBIT) over the last five years and return on capital (ROC), investors could seek great businesses that are still growing at a healthy pace over the years.

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 great combination of above-average growth rate and return on capital.

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), BRP Inc. (DOO), Dollarama Inc. (DOL) and Great-West Lifeco Inc. (GWO) are in this area. The common theme between these names is that they do have a great profile of an above-average 5-year growth record and a really solid return on capital.

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

TMX Group Limited (X): is an exchange group based in Canada, powering capital and commodity markets for clients in Canada, across North America, and around the globe. TMX Group is regulated as an exchange in Canada and as a clearing house in Québec. It has a quasi-monopolistic industry position and its key subsidiaries operate cash and derivatives markets and clearinghouses for multiple asset classes including equities, and fixed-income. X’s 5-year EBITDA growth was around 29% on average, which is solid.

BRP Inc. (DOO): is a global leader in the designing and manufacturing of powersports vehicles and marine products in North America, the company was spun out in 2013 from Bombardier Inc. DOO possessed a diversified portfolio of brands including Can-Am ATVs, SSVs, 3WVs, Ski-Doo and Lynx snowmobiles, etc. DOO has a great brand awareness among recreational vehicle enthusiasts. Despite a decent track record, the company is currently experiencing a slowdown in sales growth due to challenging consumer spending, which we think offers attractive entry points for investors.

Dollarama Inc. (DOL): is a significant retail player in Canada, operates as a dollar store chain that is known for its wide selection and affordable prices, its large network of stores offers general merchandise ranging from consumers to food and beverages. The company’s target customers include value-oriented shoppers. The company has a highly recurring and predictable revenue growth, with around 11% on average in the last few years.

Great-West Lifeco Inc. (GWO): Operates as a life and health insurance, retirement, asset management and investment service in Canada. The company has a meaningful improvement in terms of Return on Capital in the last few years from mid-single-digit to around 18% last year, largely due to a combination of industry tailwind and disciplined capital allocation.

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 5-year EBIT growth and Return on Capital employed. A common theme among the stocks we highlighted is as a group, these companies represent a basket of really high-quality businesses with healthy growth rates, high return on capital and disciplined capital allocation playbook. For other editions of our ‘Stock Teasers’, check out this latest blog on Stock Market Gems from /r/CanadianInvestor!

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