Digging for nuggets in the rallying basic-materials sector

The Globe and Mail, Number Cruncher

By Peter Ashton

Friday, July 6, 2018

What are we looking for?

Canadian basic-materials stocks with attractive fundamentals and strong price performance over the past quarter.

After a long period of under-performance, the Canadian equity market finally seems to be gathering momentum. The S&P/TSX Composite Index was up 7.5 per cent in the past quarter, significantly outperforming the S&P 500, which gained just 4 per cent. This strong performance has been led by basic-materials stocks, with this sector up 6 per cent in the past month alone. Can we find attractively priced Canadian materials stocks that may still have room to run?

The Screen

We will be using Strategy Builder to search for Canadian basic-materials stocks with strong projected earnings growth, low debt and a recent history of robust price performance. 

We will start by screening for stocks with a market capitalization of at least $3-billion. This will focus our search on the largest 20 per cent of companies in the Canadian market.

To find companies with low levels of debt, we will screen for debt-to-equity ratios of one or less. In a rising-interest-rate environment, rising debt can become a drag on earnings and company growth.

To focus on companies that have strong projected earnings growth, we will select stocks with a one-year projected earnings growth rate of 5 per cent or more. Projected earnings growth uses estimates from a consensus of in-dustry analysts.

Finally, to isolate companies with a recent track record of strong price momentum, we will screen for companies whose stock prices are up 5 per cent or more in the past quarter.

What did we find?

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Topping our list is gold miner Kirkland Lake Gold Ltd. The company has the highest quarterly price performance on our list – up more than 50 per cent in the past quarter on the back of strong quarterly results announced on May 2. Kirkland Lake also has a very low debt-to-equity ratio of just 0.03 and strong projected earnings growth for this year. 

Among the many gold miners on our list we also find Uranium giant Cameco Corp., up a very respectable 18.6 per cent in the past quarter. Cameco has benefited from a flurry of positive news in its industry, including strong commodity prices and production cuts at some competitors.

Canadian lumber and paper products firm Canfor Corp. also makes our screen, based on a remarkably strong export market for building products in the United States over the past year. However, recent trade uncertainty has muted returns over the past month with the stock price off about 5 per cent from its record high set in early June.

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

* Peter Ashton is vice-president of customer success at Trading Central.

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