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 and 10-year EBIT annualized growth rate. Combining these two variables gave investors a decent list of companies with the most profitable growth profiles over the last decade in the Canadian market. It is counterintuitive that not all growth will create value for shareholders. By looking at the return on capital employed and EBIT growth in the last ten years, investors could seek businesses that grew in a value-creating manner, these companies could be considered as potential long-term compounders.

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 strong earnings growth and high returns on capital.

Let’s take a closer look at some of the stocks which encompass this section of the graph. We can see Constellation Software (CSU), Dollarama (DOL), Toromont Industries (TIH) and Celestica (CLS) are in this area. 

The common theme between these names is that the growth in their fundamentals, i.e. earnings, would be the primary driver of the company’s share price over time, and companies with strong, stable earnings growth while being able to earn high returns on the reinvestment are the hallmarks to compound capital in a tax-efficient way. 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 become the role model for serial acquirers in the global market. The company has been one of the best-performing stocks in the Canadian market in the last ten years. CSU has demonstrated solid execution to consistently redeploy capital at a high rate of return by acquiring vertical market software assets year after year. CSU managed to grow its topline by around 21% on average each year in the last ten years and has become a classic compounder that every investor should almost never sell.

Celestica (CLS): CLS provides manufacturing and supply chain-related solutions in North America. In the last five years, CLS managed to grow its topline by around 10% per year on average through a combination of organic growth and M&A. CLS also just became more aggressive in term of repurchasing shares in recent quarters. The company is trading at 20.7x Forward P/E, and organic growth over the next few years is expected to be around double-digits.

Toromont Industries (TIH) TIH is one of the leaders in the specialized equipment rental and dealership industry. The company’s service is widely used in a variety of industries, including residential and commercial construction, mining, road building and other infrastructure-related activities. TIH possesses a decent track record of capital allocation. The company is well-managed by a shareholder-friendly management team with a heavy focus on long-term dividend growth.

Dollarama (DOL): DOL is an above-average dollar store operator. Unlike American peers that are struggling to grow and improve profitability. 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. DOL runs a moderately leveraged balance sheet supported by a healthy cash flow profile. The company 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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