5i Screener: Finding Value Stocks With A Growth Twist

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With so much talk about a rotation from ‘growth to value’, we think it is important to remember that growth at the fundamental level is always something an investor should look for, even in a dividend company. We think strong fundamentals should guide stock selection regardless of whether one considers themselves to be a ‘growth’ or ‘value’ investor or a mix of both. Simply looking for low P/E ratio can result in what is known as a “value trap”. We ran a screen that looks for two important growth metrics we like to see for any stable dividend-paying company: earnings growth and dividend growth. Here are the criteria we screened for:

  1. Forward P/E ratio below 15 (TSX average P/E is ~17x)
  2. Five-year annual dividend growth of more than 5%
  3. Five-year annual earnings growth of more than 5%

We included dividends not as a way to exclude growth-oriented investors, but more as a way to find companies that have reached a certain level of maturity and stability. Dividend growth is also a sign of healthy cash flows and balance sheet. Investors with a growth focus may find value (pun intended) in this screen if one is looking to reduce some portfolio risk from ‘expensive’ growth names.

Here is a list of companies that match these criteria listed in order of highest to lowest earnings growth:

Ticker Company Name Forward P/E  Dividend Growth Hist 5 YR EPS 5 YR Hist Growth
CF.TO Canaccord Genuity Group Inc 10.09 9.9% 72.89
ALC.TO Algoma Central Corp 12.40 12.3% 71.66
HDI.TO Hardwoods Distribution Inc 14.28 11.2% 32.79
LASa.TO Lassonde Industries Inc 12.67 10.3% 32.35
GSY.TO goeasy Ltd 14.19 35.1% 31.19
LIF.TO Labrador Iron Ore Royalty Corp 8.91 20.6% 26.60
EMPa.TO Empire Company Ltd 13.85 5.9% 23.43
QBRb.TO Quebecor Inc 12.79 65.2% 19.20
AGI.TO Alamos Gold Inc 12.19 10.2% 16.70
LNF.TO Leon's Furniture Ltd 11.86 7.7% 15.40
OTEX.TO Open Text Corp 14.20 14.3% 13.52
EQB.TO Equitable Group Inc 9.19 14.9% 12.44
TRP.TO TC Energy Corp 14.02 14.4% 11.68
ZZZ.TO Sleep Country Canada Holdings Inc 14.57 35.1% 10.56
IAG.TO iA Financial Corporation Inc 8.94 10.8% 10.24
CAS.TO Cascades Inc 7.60 14.9% 8.59
SLF.TO Sun Life Financial Inc 10.55 7.8% 8.49
CWB.TO Canadian Western Bank 10.37 6.5% 7.07
NA.TO National Bank of Canada 11.22 7.0% 6.70
CTCa.TO Canadian Tire Corporation Ltd 12.38 16.7% 6.52
MIC.TO Sagen MI Canada Inc 8.43 6.3% 5.42

Most names are recognizable as mature companies, which in fairness tend to have lower P/E ratios by nature. There are a few that stand out and we found have been consistent in rewarding shareholders over the long-term and some we would consider a good mix of value and growth.

One example found in the Growth Model Portfolio that continues to exceed expectations is goeasy (GSY). The company arguably trades at a relatively low price-to-earnings ratio due to its association with the financial sector and higher risk lending. As a lending company the company trades at a slightly higher multiple than the big banks while achieving much higher revenue and earnings growth. The company also has a solid dividend growth track record. This one continues to be a value/growth play in our books.  

Leon’s Furniture (LNF) is another company that continues to impress on fundamentals, but we think may need time for the valuation to catch up. While shares have reached new highs, the forward P/E ratio sits at just under 12x. For context, this is down from ~14.5x in 2018. Admittedly, this is a mature slow growth company but LNF essentially has a monopoly in Canada and has significantly improved its online presence as we have discussed in our recent report here. The company’s balance sheet has improved compared to its past with plenty of cash and growing free cash flows. At an attractive dividend yield of 2.8% and a payout ratio of just 22%, we think the stock is well set up to reward shareholders.

Finally, one that we may have not discussed much in the past but could be interesting for income seekers is Labrador Iron Ore Royalty Corporation (LIF).  This company is a trust that collects royalties from its equity investment in Iron Ore Company of Canada (IOC). The royalty structure reduces some of the risk associated with operating costs of mining and could benefit from increased steel demand in an economic recovery. The yield is also quite impressive at 10%. The caveat here is a high dividend payout ratio of 85%, but this is less concerning as cash flows have been heading in the right direction.

While we would not expect earth-shattering returns from most names on this list, hopefully this helps with some ideas for an investor that is either looking for income and/or a margin of safety on the downside and potential appreciation from an economic recovery or multiple expansion.

Always do your research and take care.

Moez Signature

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Disclosure: Please note that the author does not hold a financial or other interest in stocks or funds mentioned.

 

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