Finding financial strength beyond Canada’s resource sectors

What are we looking for?

With market uncertainty keeping investors focused on corporate fundamentals, companies with strong financial profiles and manageable debt levels may offer an attractive starting point for equity research. While Canada’s energy and basic materials sectors often dominate the headlines, opportunities can also be found across financial services, industrials, technology and consumer businesses.

This week, we look beyond those resource-heavy sectors to identify Canadian companies combining solid quantitative ratings with relatively conservative balance sheets. The results reveal an interesting mix of established market leaders, strong share-price performers and companies that have yet to participate fully in this year’s market gains.

The screen

We used Trading Central’s Strategy Builder to screen TSX-listed companies, excluding the energy and basic materials sectors. Our criteria required a minimum market capitalization of $1-billion and a TC Quantamental Rating of 55 or higher, a composite score that evaluates companies across value, growth, quality, momentum and income factors. The same proprietary multifactor methodology underpins the Solactive TC Quant indexes, including the Solactive TC Quant Canadian 50 Index, tracked by the Trading Central Quant Canada 50 Equity Index ETF (TCCA-T).

We also required a debt-to-equity ratio below 1.0 to identify companies with relatively manageable debt levels. We imposed no maximum price-to-earnings ratio, allowing both growth- and value-oriented companies to qualify, while including the metric for valuation context.

The screen returned 13 companies spanning insurance, industrials, financial services, technology, transportation and consumer businesses.

More about Trading Central

Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities. Strategy Builder, our stock screener, is available through leading retail brokers in Canada and worldwide.

What we found

Topping our list is E-L Financial Corp. Ltd. (ELF-T), a Canadian investment and insurance holding company. With a TC Quantamental Rating of 73, the highest on our screen, the company stands out for its strong overall quantitative profile and exceptionally low debt-to-equity ratio of 0.09. The stock trades at a P/E ratio of just 3.9, the lowest among the qualifying companies. With a market capitalization of $6.9-billion, shares have gained 20.5 per cent year-to-date, demonstrating that strong fundamentals and a relatively low earnings multiple can co-exist.

TMX Group Ltd. (X-T), which operates the Toronto Stock Exchange, TSX Venture Exchange and other financial market infrastructure businesses, earns a TC Quantamental Rating of 62 and maintains a debt-to-equity ratio of 0.58. Shares have advanced 18.5 per cent year-to-date, highlighting the company’s solid market performance alongside its financial fundamentals. TMX Group is a current holding in the Trading Central Quant Canada 50 Equity Index ETF (TCCA-T).

Manulife Financial Corp. (MFC-T), one of Canada’s largest insurance and wealth management companies, earns a TC Quantamental Rating of 56 and maintains a debt-to-equity ratio of 0.30. Shares have gained 28.9 per cent year-to-date, demonstrating strong market performance alongside a relatively conservative balance sheet. Manulife is also a current holding in the Trading Central Quant Canada 50 Equity Index ETF (TCCA-T).

Trading Central Strategy Builder offers a back-testing capability to evaluate how well an investing strategy would have performed in the past. Using a five-year historical period with quarterly rebalancing, the screen described above generated a hypothetical annualized return of 18 per cent, compared with 11 per cent for the S&P/TSX Composite Index over the same period.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of investing in financial instruments. Investors should conduct further research before investing.

Gary Christie is head of North American research at Trading Central in Ottawa.