THURSDAY, AUGUST 1, 2019 | THEGLOBEANDMAILO B9
EYE ON EQUITIESDAVID LEEDER
CANACCORD GENUITY (CF-TSX)
CLOSE $5.52, UP 3¢
GREENBROOK TMS (GTMS-TSX)
CLOSE $2.95, UP 5¢GENWORTH MI CANADA (MIC-TSX)
CLOSE $48.71, UP $3.71DREAM OFFICE REIT (D.UN-TSX)
CLOSE $24.59, UP 34¢APPLE (AAPL-NASDAQ)
CLOSE US$213.04, UP US$4.26Canaccord Genuity Group Inc.’s
“track record speaks to strategy,
discipline and success,” Echelon
Wealth Partners analyst Rob Goff
said. Calling the firm’s “high pre-
mium” wealth-management
platform a “crown jewel” and
“significantly” undervalued by
investors,Mr.Goffinitiatedcover-
age with a “buy” rating.
Target:He set a target price of
$10. The consensus target on the
Street is $9.33.
Greenbrook TMS Inc.ispoisedto
benefit from both a first-mover
advantage and “highly” replica-
ble business model, according to
Desjardins Securities analyst Da-
vid Newman. He initiated cover-
age of the Toronto-based provid-
er of transcranial magnetic stim-
ulation with a “buy” rating.
Target:Mr. Newman set a target
of $4.25. Consensus is $5.38.After better-than-expected sec-
ond-quarter financial results and
pointing to a “more positive out-
look for both premiums written
and earnings,” CIBC World Mar-
kets analyst Paul Holden upgrad-
edGenworth MI Canada Inc.to
“neutral” from “underperform-
er.” “We now have modest growth
in 2019 versus no growth previ-
ously,” he said.
Target:Mr. Holden raised his tar-
get to $48 from $46. Consensus is
$51.33.BMO Nesbitt Burns analyst Jenny
Ma upgradedDream Office REIT
to “outperform” from “market
perform” with the belief “strong
downtown office fundamentals
in Toronto will support healthy
rent growth and downward pres-
sure on cap rates.”
Target:Ms. Ma raised her target
to $28 from $26. Consensus is
$26.38.Investors are missing a shift in
Apple Inc.’sbusiness, according
to Citigroup analyst Jim Suva.
“Read this slowly and ponder it:
Apple’s wearable, home, & acces-
sory category is larger than iPad
sales,” he said. “This underscores
a new theme that is starting to
emerge from Apple ... and that is
thediversityofApple’sofferings.”
Target:With a “buy” rating, Mr.
Suva hiked his target to US$250
from US$205. Consensus is
US$218.19.WHAT ARE WE LOOKING FOR?
Canadian-listed stocks that com-
binevalue,momentumandqual-
ity.
THE SCREEN
In a cyclical market such as Cana-
da, being a purely value-based in-
vestor is often a challenge owing
to the influence of commodity
pricesthatdrivealargeportionof
the Canadian economy. Remem-
ber that the materials and energy
sectors together make up almost
30 per cent of the S&P/TSX Com-
posite Index. Swings in supply
and demand of said commodities
often come with volatility in the
stock price, even if a company is
considered undervalued funda-
mentally. A more suitable strate-
gy may be to combine value, mo-
mentum and quality metrics to-
gether to find stocks that are less
likely to fall into a value trap.
This week, I use Morningstar
CPMS to rank the stocks in our
Canadian universe (today con-
sisting of 703 companies) on a
combination of the following
metrics:
Value: price-to-earnings,
price-to-book and price-to-sales
ratios relative to the stock’s own
10-year median (in the table, a
value of 0.9 means that the valua-
tion metric is 10-per-cent lower
than its 10-year historical
median);
Momentum: price change
from 12-month high (in the table
afigureofminus3percent,forex-
ample, would indicate the com-
pany is trading 3 per cent below
its 52-week high, higher figures
preferred here), and six-month
price change (higher figures pre-
ferred);Quality: Five-year average re-
turn on equity and five-year de-
viation of earnings (a safety met-
ricmeasuringhowvolatileacom-
pany’s earnings have been over
the last five years, lower figure
preferred, not shown).
To qualify, companies must
haveamarketcapgreaterthan$1-
billion (this figure is meant to ex-
clude the bottom two-thirds of
companies in Canada by size),
and must have a positive trailing
return on equity (not shown).
Unit trusts were excluded in this
analysis.MORE ABOUT MORNINGSTAR
Morningstar Research Inc. pro-
vides independent investment
research in North America, Eu-
rope, Australia and Asia. Its re-
search tool, Morningstar CPMS,
provides quantitative North
American equity research and
portfolio analysis to institutional
clients and financial advisers.
CPMSdatacovermorethan95per
cent of the investable North
American stock market.WHAT WE FOUND
I used Morningstar CPMS to back-
test this strategy from May, 1992,to June 2019. During this process,
amaximumof15stockswerepur-
chasedandequallyweightedwith
nomorethanthreepereconomic
sectortoensurereasonablediver-
sification across the economy.
Once a month, stocks were sold if
theirrankfellbelowthetop35per
cent of the universe, if consensus
earnings estimates fell by more
than 10 per cent over the trailing
three months (not shown), or if
the company reported a negative
return on equity.
When sold, the positions were
replaced with the highest-ranked
stock not already owned in the
portfolio. Over this period, the
strategy produced an annualized
total return of 13.8 per cent while
theS&P/TSXCompositeTotalRe-
turn Index gained 8.6 per cent.
The maximum drawdown (the
percentage change in the portfo-
lio value, measured from peak to
trough over consecutive months)
for the portfolio was minus 26.1
per cent (October, 2007, to Febru-
ary, 2009) while the maximum
drawdown for the index was mi-
nus 43.4 per cent (May, 2008, to
February, 2009), which speaks to
the defensive nature of this mod-
el.
The stocks that qualify for pur-
chase today are listed in the ac-
companying table. It is always
recommended to speak to a fi-
nancial adviser or investment
professional before investing.Three-in-onestrategyseekstoweedoutvaluetraps
Select TSX stocks ranked according to combined value, momentum & quality metricsRANK COMPANY SYMBOLMKT.CAP.
($MIL.)P/EREL.
TOHIST.
MEDIANP/BREL.
TOHIST.
MEDIANP/SREL.
TOHIST.
MEDIANPRICE
CHG.FROM
12MHIGH(%)PRICECHG.
FROMMONTHEND,
6MAGO(%)5YAVG.
ROE(%)RECENT
CLOSE($)DIV.
YLD.(%)
1 CIFinancialCorp. CIX-T 4,915.9 0.5 0.8 0.6 -12.3 16.5 31.7 20.6 3.5
2 EquitableGroupInc. EQB-T 1,340.3 1.0 0.9 0.9 -0.6 20.7 16.3 80.48 1.6
3 BauschHealthComp. BHC-T 11,339.1 0.4 1.1 0.2 -11.2 0.5 42.0 32.42 0.0
4 EmeraInc. EMA-T 12,853.8 1.0 0.9 1.0 -1.1 18.5 10.4 54.5 4.3
5 SunLifeFinancialInc. SLF-T 32,461.7 0.8 1.1 1.0 -2.1 15.7 12.5 54.82 3.8
6 TelusCorp. T-T 28,408.6 1.0 1.0 1.0 -7.8 2.7 19.0 47.24 4.8
7 WestshoreTerminals WTE-T 1,431.3 0.7 0.7 0.6 -22.0 -1.8 22.5 21.46 3.0
8 NorthWestCo.Inc. NWC-T 1,472.2 0.9 1.0 1.0 -9.7 -3.9 22.0 29.96 4.4
9 AltaGasLtd. ALA-T 5,448.6 0.7 0.6 0.5 -25.8 46.8 5.3 19.75 4.9
10 KinaxisInc. KXS-T 2,200.9 1.0 0.7 1.0 -16.4 7.7 26.9 84.15 0.0
11 CrescentPointEnergy CPG-T 2,351.3 0.1 0.2 0.1 -52.0 9.2 1.9 4.28 0.9
12 KeyeraCorp. KEY-T 7,212.5 0.9 0.7 1.0 -13.2 21.0 18.6 33.78 5.3
13 SemafoInc. SMF-T 1,802.2 0.4 1.1 1.1 -2.9 82.2 3.5 5.41 0.0
14 HydroOneLtd. H-T 13,993.3 0.8 1.1 1.0 -2.2 13.9 8.2 23.46 4.1
15 StantecInc. STN-T 3,517.7 0.9 0.9 0.9 -10.1 0.8 12.8 31.5 1.8
Source:MorningstarCPMSIAN TAM
NUMBER CRUNCHER
Relationship manager for CPMS at
Morningstar Research Inc.
S
hares of smaller U.S. compa-
nies have gotten cheap over
the past year, significantly
lagging their large-cap counter-
parts, and could be poised for a
turnaround after a highly antici-
pated interest-rate cut from the
Federal Reserve.
Worries about a slowdown in
economic growth have soured
investor sentiment toward small-
cap companies, which are more
domestically focused than large-
cap multinationals. Profits for
small-cap companies have also
been squeezed by higher input
costs as a result of the U.S.-China
trade war, so the group is more
vulnerable to an aging business
cycle.
Over the past 12 months, the
Russell 2000 index of small-cap
shares has fallen 4.3 per cent and
the S&P 600 small-cap index has
fallen 6.9 per cent while the
large-cap benchmark S&P 500
has gained 7.1 per cent.
So far in 2019, the Russell 2000
and the S&P 600 have risen, but
at a slower rate than the S&P 500.
Unlike the S&P 500, neither
small-cap index has made new
highs this year.
Small-cap stocks have yet to
fully rebound from December’s
equity sell-off that followed the
Fed’s interest-rate hike that
month amid global growth con-
cerns. Investors see rising inter-
est rates as especially costly to
smaller companies that tend to
receive financing through adjus-
table-rate bank loans instead of
the fixed-rate debt financing that
larger companies can access
through capital markets.
Indebted small-cap compa-
nies will benefit from the Fed’s
interest-rate cut on Wednesday,
its first in more than a decade.
“One of the concerns people
had with small was that their bal-
ance sheets are in much worse
shape, but the Fed fixes that by
lowering rates,” said Steven De-
Sanctis, equity strategist at Jeffer-
ies in New York.
Slumping shares have hit
small-cap valuations significant-
ly. The shares usually trade at a
higher multiple than large-cap
shares because of growth pro-
spects, but the 12-month forward
price-to-earnings ratio of the S&P
600, at 17.1, has slid below the
17.4 for the S&P 500, Refinitiv da-
ta showed.
Coupled with lower interest
rates, small-caps’ relative cheap-
ness could tip the balance in
their favour over the next few
months, some investors said.
“Small-caps will have their day
in the sun,” said Robert Phipps,
director at Per Stirling Capital
Management in Austin, Tex.
“They’re actually cheaper” than
large-cap stocks, “which is very
unusual.”
Profits of smaller companies
have also lagged, and lower in-
terest rates would bolster earn-
ings by cutting the cost of servic-
ing debt.
Estimates show small-cap
earnings are close to a trough,
which could signal a coming up-
turn in share prices, said Keith
Lerner, chief market strategist at
SunTrust Advisory Services in At-
lanta.“The earnings for small-caps
relative to large-caps have now
stabilized,” he said. “The down-
turn momentum has subsided.”
Refinitiv data show earnings
for the S&P 600 are expected to
shrink 8.6 per cent year over year
for the second quarter of 2019,
but edge up 1.6 per cent in the
third quarter and jump 19.4 per
cent in the fourth quarter.
To be sure, small-caps have of-
ten underperformed large-caps
when the Federal Reserve has cut
rates in non-recessionary peri-
ods, according to analysis from
LPL Financial and Ned Davis Re-
search. Analysis from Merrill
Lynch also gives a mixed picture
of small-cap performance after
Fed rate cuts, said Jill Carey Hall,
a U.S. equity strategist for the
bank in New York.
“Small-caps have thrived on
access to cheap capital, but over
all, when we look at ... those ini-
tial rate cuts, it hasn’t necessarily
been more beneficial for small-
caps’ performance,” she said.
Even so, in a recent note, Ms.
Carey Hall identified investment
opportunities in selected
growth-oriented small-cap
stocks with relatively low valua-
tions, such as Party City Holdco
Inc. and Asbury Automotive
Group Inc.
In particular, cyclical sectors
such as industrials and materials
contain bargain-priced small-cap
shares that look poised to re-
bound, said Eric Marshall, port-
folio manager at Hodges Capital
in Dallas.
“There’s room for stocks like
that to get re-evaluated,” he said.REUTERSAPRIL JOYNER
CAROLINE VALETKEVITCH
NEWYORK
Fedratecutcouldhelp
cheapU.S.small-cap
stocksgainfavour
CANADIAN STOCKS
The U.S. Federal Reserve’s first interest-rate cut in a decade
sent North American stock markets lower Wednesday as in-
vestors expressed disappointment that further cuts aren’t
guaranteed.
The S&P/TSX Composite Index closed down 59.49 points
at 16,406.56 after hitting an intraday low of 16,282.12.
Eight of the 11 major sectors of the TSX were lower, led by
materials. It dropped 2.6 per cent as shares of several metals
producers fell on lower prices, including First Majestic Silver,
Kinross Gold and Barrick Gold. All three stocks fell at least 4
per cent.U.S. STOCKS
The Dow and S&P 500 registered their biggest daily percent-
age drops in two months after Federal Reserve chair Jerome
Powell dampened expectations for further cuts after the cen-
tral bank’s first interest rate cut in a decade.
All three major U.S. stock indexes ended the session lower
after Mr. Powell said today’s move was not the beginning of a
lengthy rate-cutting cycle.
The Dow Jones Industrial Average lost 1.23 per cent, to
26,864.27, the S&P 500 lost 1.09 per cent, to 2,980.38, and the
Nasdaq Composite dropped 1.19 per cent, to 8,175.42.
SharesofGeneralElectricdipped0.8percentafterthecon-
glomerate posted a quarterly loss and announced the retire-
mentofitschieffinancialofficerJamieMiller.ChipmakerAd-
vanced Micro Devices slumped 10.1 per cent after its disap-
pointing third-quarter revenue forecast, dragging the Phila-
delphia Semiconductor index down 3.2 per cent. Molson
Coors Brewing dropped 5.1 per cent after missing quarterly
profit expectations and announcing the retirement of chief
executive officer Mark Hunter.COMMODITIES
Oil prices rose for a fifth day after a larger-than-expected
drop in U.S. inventories and after the interest-rate cut.FOREX AND BONDS
The Canadian dollar weakened to a more-than five-week low
against the greenback, as comments by the Federal Reserve
that were seen by some investors as hawkish offset domestic
datashowingstronger-than-expectedeconomicgrowth.The
U.S. dollar rose to two-year highs after Mr. Powell signalled
the interest-rate cut was not the start of a rate-cutting cycle.
Canadiangovernment bond prices were mixed across a
flatter yield curve in sympathy with U.S. Treasuries. The two-
yearfell4.5centstoyield1.556percentandthe10-yearwasup
7 cents to yield 1.486 per cent.
The margin between U.S. short- and long-dated yields col-
lapsed to its lowest level in more than four months on
Wednesday.REUTERS AND THE CANADIAN PRESSMarketssummary
REPORTONBUSINESS|