Canada’s best stocks 2015

Our All-Star stocks have now delivered a stunning 17.3% average annual return over 10 years

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From the December 2014 issue of the magazine.

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The holidays can be a tough time for those who agonize over decisions. You have to choose the right wine for Christmas dinner, the right tree for the living room, and just the right gift for Mrs. Wright who teaches arithmetic to Junior. Picking the right stocks for your portfolio can be even more taxing. If you make the wrong choice here, the fallout could be far greater than dealing with a disappointed math teacher.

That’s why we’re pleased to offer a helping hand with the 11th annual MoneySense Top 200 guide to Canadian stocks. It’s packed with the information professional investors like to consider, as well as an easy-to-use grading system for less seasoned investors.

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Unlike other stock-picking systems, ours has a full decade of stellar, easily verified performance behind it. Our annual All-Star stock picks, which combine the best growth and value characteristics, have climbed by an average of 17.3% a year since we started 10 years ago. That assumes an equal dollar amount was put into each All-Star stock in the first year and rolled into the new All-Stars each year thereafter. By way of comparison, the S&P/TSX Composite (as represented by the XIC ETF) advanced by just 5.3% annually over the same period. The All-Stars beat the market by an average of 12.0 percentage points per year over the last decade.

The graphs below convert those percentages into more easily understandable dollar terms. If you had split $100,000 equally among the original All-Stars 10 years ago and moved into the new stocks each year, your portfolio would now be worth approximately $492,000—almost five times your original investment.

However, those wonderful average gains came with a few disappointments along the way. For instance, the All-Stars lost almost 33% from November 2007 to November 2008. They also trailed the market in three of the last 10 annual periods.

Top200returnsAs it happens, this past year has been one of the disappointing ones. While the All-Star stocks climbed 2.3% since last time, they trailed the S&P/TSX Composite ETF, which gained 9.3%. (The return figures shown above do not include dividends.) We’d love to be able to say such disappointments are a thing of the past, but seasoned investors know that every stock- picking method runs into difficulty from time to time. We fully expect the All-Stars to lag the market, or even lose money, on occasion. In addition, some individual stocks inevitably go sour. While we do our best to avoid such situations, it’s just not possible to take the market’s gains without experiencing its downside now and then.

The Top 200 examines Canada’s largest 200 companies (by revenue) using data from Bloomberg. Each firm is graded in two very different ways. First we consider its attractiveness as a value investment and then we determine its appeal as a growth investment. Our value and growth tests employ sophisticated calculations that are based strictly on the numbers. Our feelings or intuitions about a company don’t enter into it. But we sum up everything about a stock in easy-to-understand grades—one for value and the other for growth.

The grades work just like they did when you were in school. Top stocks get As. Solid firms are awarded with Bs or Cs. Those that don’t measure up get Ds or even Fs. Stocks with good grades are deemed to be worthy of consideration while those the class should be treated with caution. The select group of stocks that get at least one A and one B on the value and growth tests make it into the All-Star list. Before we talk about them, let’s walk through the grading process.

How to measure value

Value investors like solid stocks selling at low prices. That’s why we look for companies with low price-to-book-value (P/B) ratios. This ratio compares a firm’s market value to the amount of money that could be raised by selling off its assets (at their balance-sheet values) and paying off its debts. A low P/B ratio provides some assurance that you’re not paying much more for a company than its parts are probably worth. To get top marks for value, a stock must possess a low P/B ratio compared to the market and also compared to its peers within the same industry.

We also track price-to-tangible-book-value ratios. Tangible book value is like regular book value, but ignores intangible assets like goodwill. It’s an even sterner test of how much a company would be worth if it had to be sold off for scrap.

Assets are one thing, but it’s also important to investigate each company’s bottom line. We prefer profitable companies and award higher grades to firms with positive price-to-earnings (P/E) ratios (based on their earnings over the past 12 months). We also reward a company if industry analysts expect it to be profitable and have a positive P/E over the next year. (This number is known as the forward P/E ratio.)

Because we know investors enjoy getting some spending money, we award extra marks to firms that pay dividends. As it happens, dividend-payers generally outperform the miserly firms that don’t pay dividends.

For safety’s sake we also want to make sure a company hasn’t loaded up on debt. That’s why we award better grades to firms with low leverage ratios (defined as the ratio of assets to stockholders’ equity) relative to their peers.

We combine these factors into a single value grade. Only 20 out of 200 stocks got an A this year.

Grading for growth

Growing firms tend to be healthier than those in decline. That’s why we award higher marks to any company that has achieved reasonable earnings-per-share and sales-per-share growth over the last three years. We also track each firm’s growth in total assets over the last year to get a sense of the momentum in its business.

While fundamental growth is great, we also like it when the market takes notice. That’s why we give higher marks to stocks with solid returns over the past year.

In addition, we want to make sure that companies use their capital wisely. So we scrutinize each stock’s return on equity, which measures how much a firm is earning compared to the amount shareholders have invested. Return on equity is a measure of business quality and we give high marks to those firms which outperform their peers.

Since no one wants to buy an overly inflated stock, we weigh up each stock’s price-to-sales ratio, which as you might expect, compares its price to its sales. We figure stocks with low-to-moderate ratios are reasonably priced while those with sky-high ratios could suddenly fall back to earth.

We put these factors together to determine each stock’s growth grade. Only 20 out of the 200 got an A this year.

SUBSCRIBERS ONLY: The Top 200: All-Star Stocks »

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NON-SUBSCRIBERS: Download The Top 200 Premium Package for $14.95 »
 

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Norm Rothery, CFA, PhD, is the founder of StingyInvestor.com and tweets as @NormanRothery. He may hold some of the securities mentioned in this article.

19 comments on “Canada’s best stocks 2015

  1. I am a long term subscriber to Moneysense, one who has gifted subscriptions to others. Perhaps not for much longer. Your 2015 Top 200 Canadian Stock presentation, both on screen and printable, is terrible. I seem not to be recognized as a subscriber though I do sign in. I cannot print full report sections. What happened to the very useful excel spreadsheet of stock, value, growth, etc that has been available in past years?? Relegated to the paper version…..

    Very dissatisfied,

    Bruce.Carmichael@hotmail.com

    Reply

    • Bruce, I seem to be having the same problem. I sign in, but when I hit investing It takes me to a new tab I have to sign in again. On this tab I can’t seem to sign in. Very frustrating.
      If anyone has the top 10 or 12 stock, maybe they can post it here.
      Thanks

      Reply

        • That seemed to work for me. Thanks you Stefania.

          Reply

    • Due to popular demand, we’ve decided to make the downloadable spreadsheets available to subscribers free of charge and to non subscribers for $14.95 in addition to making the lists available online earlier than ever before. See above for links.

      Reply

  2. Last year Money Sense offered the ability to buy the Canadian200 and US500 in downloadable Excel sheets. Will that be an option again this year?

    Reply

    • We have decided not to sell downloads this year but will consider it for next year.

      Reply

    • Due to popular demand, we’ve decided to make the downloadable spreadsheets available to subscribers free of charge and to non subscribers for $14.95 in addition to making the lists available online earlier than ever before. See above for links.

      Reply

  3. When will the full Excel and Pdf version be available for download like previous years? I can’t find anything of the sort on line… today anyways.
    Thanks.

    Reply

    • Currently, we don’t have plans to make Excel/PDF versions available for download. Instead we made the list available only to subscribers online and earlier than ever before. Thanks for reading.

      Reply

    • Due to popular demand, we’ve decided to make the downloadable spreadsheets available to subscribers free of charge and to non subscribers for $14.95 in addition to making the lists available online earlier than ever before. See above for links.

      Reply

  4. I can’t sign in either. I have a paid paper subscription and I signed up as indicated on the site through the link in the comments below but when I try to access the list of stocks it asks me to sign in again. It keeps taking me in a loop – signs me in but when I click to access the list it asks me to sign in again. I have access to the article with the commentary but not the list of stocks.
    Does any one else notice that the paper copy of the magazine is very slow to reach your mail box. I often see the latest issue onteh newsstands 2 weeks before my copy gets tome – very frustrating.

    Reply

    • twa2w: your magazine account number is missing from your user profile which is why you can’t see the list. Please sign in: http://www.moneysense.ca/signin and click “Edit My Profile” under your name in the top right-hand corner of your screen.

      Reply

      • I input the number yesterday when I signed up. I tried again this morning with no luck. I tried with the letters capitalized and un-capitalized and with a space and with out. I also tried putting the first three letters PFM and without just in case. Some times it told me the number I entered was incorrect, other times it seems to have accepted it but it still didn’t give me access so I tried signing out and in again with no luck.. Any suggestions?

        Reply

  5. Hello Mr. Rothery,

    I have to ask: why wasn’t Valeant Pharmaceuticals included on your list? The list is composed of “Canada’s largest 200 companies by revenue”, according to the criterion described in the article. Valeant has revenue of nearly $6-billion, as of 2013 reporting. There are many reasons why I would never invest in VRX, but it is a Canadian company and its CEO Pearson was recently ranked #8 CEO in the world by Harvard Business. Why was VRX excluded from the list?

    Reply

  6. Hey Norm, the long-term return has been outstanding, but what about last year? “As it happens, this past year has been one of the disappointing ones. While the All-Star stocks climbed 2.3% since last time, they trailed the S&P/TSX Composite ETF, which gained 9.3%.” Do you have any further thoughts on what the cause(s) are for the lack of performance in the All-star list last year. Thanks,

    Reply

  7. I just subscribed and very disappointed I am not able to view the interactive list (only 4 columns) and I also get an error when I try and download the top 200 package. Opens a new tab and gives error Internal Server Error. The server encountered an internal error or misconfiguration and was unable to complete your request. Please contact the server administrator, or webmaster and inform them of the time the error occurred, and anything you might have done that may have caused the error.

    Not a great first experience. Any suggestions on how to obtain this information or escalate to resolve this error and the issue with your “interactive list”?

    Reply

    • Sorry for the inconvenience spider. Please email your name, mailing address and subscription number to letters@moneysense.ca. As soon as we can verify your subscription we’ll email you a copy of the download file.

      Reply

  8. Why is there no email contact on your web site? This site took me 15 minutes to find. I am a subscriber, I have signed in but I can not get any info! How do I get your sales stuff from coming up?

    Reply

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