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.

CAPM Screen

We have used the following variables across the Canadian stock universe: five-year monthly beta and total five-year return CAGR. Beta is a measure of risk for a stock or more specifically a measure of a stock's volatility in relation to the overall market. Combining these two variables connects to traditional finance theory of the capital asset pricing model (CAPM). The model makes numerous assumptions about investors and market behavior, but the key takeaway is that a higher beta (risk) implies higher expected returns when markets rise, and greater losses when markets fall. Looking along the x-axis we can see which Canadian stocks have the highest beta (further to the right), and on the y-axis, we can see which stocks have generated the highest annualized returns.

We have outlined two sets of stocks below on the scatter plot which are ‘outliers’ in their own ways. This green-shaded area indicates stocks that follow the traditional CAPM principles. The purple region identifies a few stocks that defy CAPM, for the better. These are low beta stocks that have generated relatively outsized annualized returns over the last five years. These companies are highlighted below:

Looking at the green region a few of the following companies are listed:

• Constellation Software (CSU): acquires, builds, and manages vertical market software businesses. The company has been a long-term compounder and its acquisitive business model has allowed it to create and maintain such strong growth. CSU has a beta of 0.8 and five-year CAGR of 28.5%.
• Stantec Inc. (STN): provides professional services in the areas of infrastructure and facilities to the public and private sectors. STN has really broke out over the last five years and has been a model of consistency. STN has a beta of 0.85 and five-year CAGR of 30.5%.
• Cameco Corporation (CCO/CCJ): is a uranium mining company. While most energy stocks are known for volatility, CCO has presented an attractive lower volatility profile to a still up-and-coming space in uranium mining. CCO has a beta of 0.93 and five-year CAGR of 38.7%.
• Tourmaline (TOU): explores for and develops oil and natural gas properties in the Western Canadian Sedimentary Basin. Similar to CCO, it is impressive that TOU can produce such returns at lower levels of volatility. One of the key strengths of TOU is its management team. TOU has a beta of 1.35 and five-year CAGR of 41.5%.
• TFI International (TFII): is a transportation and logistics company that operates in the United States and Canada. The freight industry is cyclical and volatile as displayed by TFII’s 1.42 beta and 36.6% five-year CAGR. The company is a leader in the industry and has displayed resilience to some of the industry softness recently.

In the second highlighted region, some of the companies included are Loblaws (L), Hydro One (H), Thompson Reuters Corporation (TRI), TMX Group Ltd. (X), and George Weston Limited (WN). These companies need little introduction as some of the largest, established players in the Canadian stock market. Majority of these companies are also operating in defensive sectors which are less sensitive to market and economic cycles. The purple region does a good job highlighting that higher risk does not always equal higher reward. Sometimes in the stock market, companies with a simple offering and established presence are effective at creating value for shareholders as displayed.

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 beta and five-year CAGR. A common theme among the stocks we highlighted is an established presence and strong management teams. These are typically larger cap names with a sustainable moat to their business.  For other editions of our ‘Stock Teasers’, check out our latest blog on This or That? Loblaws (L) or Metro (MRU).