Canada’s best stocks 2016

Our All-Star Stocks have generated average annual returns of 15.8% since 2004! Now meet the class of 2016

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by

From the December 2015 issue of the magazine.

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There’s something magical about the first snowfall of the season, when snowflakes meander down from the sky to cover the remnants of autumn in a white blanket. If you pause and take a close look at each flake, a world of beautiful crystals opens up. They come in all sorts of shapes and sizes, which makes it hard to pick a favourite.

In a similar way, it can be difficult to sort through the stock market to find the best prospects. That’s why we’re here to offer a helping hand with the 12th annual MoneySense All-Star guide to the Top 200 Canadian stocks. It’s packed full of just the sort of information investors crave and it includes an easy-to-use grading system.

We’re pleased to say our approach has weathered both good times and bad over the past 11 years. Our All-Star Stocks, which combine the best growth and value prospects, gained 15.8% per year on average since we started in 2004. 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 exchange-traded fund) climbed 4.4% per year over the same period.

In other words, the All-Star Stocks beat the market by an average of 11.4 percentage points per year.

SUBSCRIBERS ONLYView The Top 200 Canadian Stocks, All-Stars & more for FREE online »

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Download the 2016 Top Stocks Premium Package with all the raw data for $14.95 »

11 years of beating the market

Investors who put money into our All-Stars since we started in 2004 have enjoyed outstanding returns, easily outpacing the S&P/TSX Composite. If you had split your $100,000 portfolio equally among our All-Star Stocks every year since we launched, your holdings would now be worth $502,000—and that’s not including dividends!

11 years of beating the market

The chart above translates those percentages into more easily understandable dollar terms. If you had split $100,000 equally among the original All-Stars 11 years ago and moved into the new stocks each year, your portfolio would now be worth more than five times your original investment. Those who invested in the index would have turned their $100,000 into just $161,000.

Better yet, we’re also happy to report that last year was another positive one for the All-Star list, which gained 2.1% since our last update. It bested the S&P/TSX Composite exchange-traded fund by 5.3 percentage points over the same period. (Please note that all the return figures mentioned above do not include dividends.)

But we hasten to add that our brilliant overall gains came with a few frosty periods along the way. For instance, the market suffered from a crash of historic proportions in 2008 that saw the All-Stars fall almost 33% since the prior November. In addition, the All-Stars trailed the market in three of the last 11 annual periods.

While we’d love to be able to say that cold snaps are a thing of the past, seasoned investors know that every stock-picking method suffers from chills. We fully expect the All-Stars to lag the market, or even lose money, on occasion. In addition, some individual stocks will inevitably shatter. While we do our best to avoid such situations, investors can’t enjoy the market’s sunny periods without suffering from a frosty nip now and then.

The Top 200 focuses on Canada’s largest 200 companies (by revenue) using data from Bloomberg. Each firm is evaluated in two fundamentally different ways. First we consider a stock’s attractiveness as a value investment and then we determine its appeal as a growth investment.

Our value and growth tests employ a bevy of detailed calculations that are strictly based on the numbers. Our feelings or intuitions about a company don’t enter into it. At the end of the day, 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. The top of the class get As, solid firms are awarded Bs or Cs, and those that are lacking get Ds or even Fs. Stocks with good grades are deemed worthy of consideration while those at the bottom of 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. But, before we discuss this year’s top stocks, let’s take a closer look at how the grades are calculated.

Measuring Value

Value investors are bargain hunters who like solid stocks selling at low prices. That’s why we prefer companies with a low price-to-book-value ratio (P/B). This ratio compares a firm’s market value to the amount of money that could be theoretically raised by selling off its assets (at their balance-sheet values) and paying off its debts. A low P/B ratio provides some assurance you’re not paying much more for a company than its parts are probably worth—and to get top marks for value, a stock must have 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 it ignores intangible assets like goodwill. It’s a more rigorous test of how much a company would be worth if it had to be sold for scrap.

Assets are one thing, but it’s also important to examine a company’s bottom line. We prefer profitable companies and award higher grades to firms with a positive price-to-earnings ratio (P/E) based on their earnings over the past 12 months. We also reward a company when 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 like to rub more than a couple of pennies together, we award extra marks to firms that pay dividends. As it happens, dividend-payers generally outperform 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. All of these factors are layered into a single value grade. Only 20 out of 200 stocks got an A this time around.

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Grading for Growth

It should come as no surprise that growth investors love firms with increasing sales and earnings. That’s why we award higher marks to companies that have achieved reasonable sales-per-share (SPS) and earnings-per-share (EPS) 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 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. To do so we track 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 higher marks to those firms that outperform their peers.

Since no one wants to skate out onto thin ice, 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 extreme ratios run the risk of collapsing.

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

Before skating off to buy any stock, do your own due diligence and make sure its situation hasn’t changed in any important way. Read the latest press releases and regulatory filings, scan newspaper stories and get up to speed on all the recent developments. (Take particular care buying or selling stocks that trade infrequently.) If you do, you’ll be in a better position to weather the market’s changing seasons.

SUBSCRIBERS ONLYView The Top 200 Canadian Stocks, All-Stars & more for FREE online »

OR

Download the 2016 Top Stocks Premium Package with all the raw data for $14.95 »

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.

16 comments on “Canada’s best stocks 2016

  1. Thank you preparing and sharing these lists. I would be very grateful if you would name the ETFs that have exposure to ALL of the all-star stocks. I’m sure that other readers are thinking the same. MoneySense appears to have had a good run over the years with the all-star stocks. There would seem to be an opportunity for MoneySense to create an ETF to track the all-stars, if there isn’t one out there already with a similar methodology.

    Reply

  2. Thanks, very interesting article as always! Wondering however if there is something special about this time of the year! Or could this be implemented any time of the year with similar results? Thanks again!

    Reply

  3. Can’t see the list on iPad. Very frustrating. Your site is not user friendly. Sure glad I get hard copy.

    Reply

    • For the best tablet experience, download the issue in the MoneySense App. It’s free for subscribers!

      Reply

  4. Hi,
    I cannot access the “interactive list” link, when I click on it I only get the 4 basic column. Name price value grade and Growth Grade. I called MoneySense help line and they could NOT help me. Could anyone tell me how to get the “interactive list” ..? thank you.

    Reply

    • Hi there. In the “Top 200: Full Interactive List” have you tried clicking on the plus-sign beside company names? The table cell expands with more information such as Dividend Yield and Return on Equity, etc. I hope that helps! Sorry for the inconvenience.

      Reply

  5. The PHM stock is rated as double – A, same as last year. However, Norm Rothery states it 1 year returns were 13%. This is false. The last year to this year price was from 18.81 ( Oct 20,2014 ) to 18.89 ( Oct. 14,2015 ) for 0%. I purchased November 25th after researching it and held until now for a 11% loss. I research the allstars each year and I do utilize the research done as part of my investing strategy. I have had concerns that the numbers do not match up in certain cases over the years. I now question the credibility of the Money Sense long-term total returns.

    Reply

    • I question whether you can get these returns because you cant by simply roll last years picks into the new ones based on screen date, (as stated in the mag) unless they are public on the screen date. They don’t come out for 3-4 weeks after. Often they have moved up significantly by then.

      This year the picks were no different. They became available online Nov 11 and were already beating the tsx by 4%! Last year was the same I believe around 2-3% up before they became public too.

      They editor goes on to say in this months mag he will not make the picks available earlier.

      So I don’t know if its right to say you would have “got” those returns by simply rolling old picks into new ones.

      Reply

      • excellent observation by Jungle. Deserves an explanation to justify the claims of “beating the market ” by an overstated % that seems impossible to match without some prior no public knowledge.

        Was also concerned and curious why this year none of the lists are available for download as was in prior years for subscribers.
        Now I see an optional $14 download. So my assumption is that subscribers have to pay for this, and we pay just as much as non-subscribers. Not as much incentive to remain a subscriber…

        Reply

        • Agreed. This was a key reason I subscribed – this download was worth the price. No longer worth it.

          Reply

        • I find it absurd that I have to subscribe to the magazine and yet have to pay for the download when the online list is useless… quite frankly, try it for yourself.

          Reply

  6. The rate of return in the article needs a bit of explanation. You note that dividends are not included and that would mean the actual returns are higher. However, the returns over the 11 years would not be as high given the premise behind the all star stock selection. The premise behind this strategy is to equally split your investment capital between the all star stocks, and to do this each year. That would mean that your portfolio would require rebalancing if the same stocks are not included each year. Thus you would have to sell some of the stocks from the previous year at a presumable gain. This would result in capital gains and income tax owed. So the annualized gains you report would be lowered by the amount of income taxes owed on capital gains.

    However, all in all, this has been a very good strategy to follow. There are ETFs out there that include this years all star stock selections, but the problem would be that they also include other stocks which would detract from a true all star stock portfolio. What you would be looking for is an ETF that strictly mirrors the all star stock portfolio. This would still result in capital gains as mentioned above, but would take all the work out of for the investor. As well, you could add funds or deduct funds throughout the year without worrying about maintaining equal ratios.

    CD

    Reply

  7. This site needs some serious work to enable subscribers to access content to which they are entitled. I spent a considerable time trying to download the 2016 Top 200 stocks list to no avail. I kept going around in a circular error. Please get this sorted so I can make use of the spreadsheet.

    John Wesson ( a long-time subscriber)

    Reply

  8. great

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  9. The Canadian All Stars report listed in your Dec 2015 issue is fabulous. However, I tried to go on the website to find a downloadable spreadsheet of it but cannot find it. So is the U.S. All Stars report. Why?

    I recall during past years, same reports were available for download in a spreadsheet format. Can you please comment? Thank you. Kum Ping from Brampton.

    Reply

    • Hi and thanks for your comment. For raw data capabilities beyond what’s provided online on MoneySense.ca, we offer a completely unlocked version via download for a small fee. It’s available for purchase here. Thank you for subscribing.

      Reply

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