What are we looking for?
Canadian industrials with relative strength.
The screen
The industrials sector has been a mixed bag of winners and losers this past quarter.
Digging into the S&P 100 and S&P/TSX 60 indexes, Raytheon, Lockheed Martin and Canadian National Railway were top performers with returns of 14.2 per cent, 12.3 per cent and 5.6 per cent, respectively.
Rounding out the worst performers were Bombardier, Caterpillar and Emerson Electric with losses of 26.4 per cent, 22.2 per cent and 19.6 per cent, respectively.
To search for some potential ideas within the sector, my colleague Lawrence Ullman and I used CPMS to rank Canadian industrial firms with market caps above $500-million based on the best mix of:
- return on capital (earnings before interest and taxes divided by average capital over the past year);
- EV/EBITDA (enterprise value divided by earnings before interest, taxes, depreciation and amortization);
- percentage change from 200-day average price;
- three-month consensus earnings estimate revision;
- three-month price volatility (for this strategy we assign a higher grade for lower volatility).
More about the Ullman Group
The Ullman Group is an independent provider of strategic private capital management services to high net-worth individuals, corporations, endowments, charities and foundations.
What we found
We used CPMS to perform a back-test starting Sept. 30, 2005, selecting an equally weighted portfolio of the top 10 industrial stocks.
Every month-end, ranks would be recalculated and stocks would be replaced if their rank fell outside of the top 40 per cent of the universe. Over the full period, this strategy would have generated an annualized total return of 11.3 per cent compared with 4.8 per cent for the S&P/TSX total return index.
Over the past year, this strategy would have posted a return of 9.7 per cent compared with – 8.4 per cent for the index.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates.
Investors should contact a professional or do their own research before investing in any of the stocks shown here.
Craig McGee, CFA, is a portfolio manager and Lawrence Ullman, MBA, is a director, wealth management and portfolio manager with the Ullman Group at Richardson GMP in Toronto.
Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.
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