A defence against possible market turbulence

The Globe and Mail, Number Cruncher

By Peter Ashton

Friday, October 27, 2017

In The Globe and Mail, Peter Ashton uses Strategy Builder to find Canadian listed stocks that offer low volatility. 

What are we looking for?

Canadian value stocks exhibiting low volatility. With Canadian and U.S. stock indexes now trading near all-time highs, many market watchers are suggesting caution is warranted in light of some of the lofty valuations seen by some stocks. Although Canadian stocks have not seen the same rapid advance as U.S. stocks this year, one-third of Canadian stocks are now trading within 5 percent of their 52-week highs. A strategy to seek out low volatility stocks may be rewarded in the case of a correction or market downturn.

The Screen

We will be using Strategy Builder to search for Canadian stocks with reasonable valuations, low volatility and strong dividends. To select companies that are currently reasonably priced, we will screen for stocks with a forward price-to-earnings ratio of 18 or less. Forward P/E uses analyst estimates for company earnings in the coming year. To further refine our list, we will apply a second valuation filter to look for price-to-book ratios of less than four. Dividend-paying stocks often provide a refuge in the case of market turbulence because of their income generating nature. We will also screen for stocks with a dividend yield of greater than 2.5 per cent. Finally, to select stocks with lower than average volatility, we will filter using beta. We will select stocks with beta of between 0.5 and minus 0.5. Beta measures the price correlation of a security compared with the entire market. Stocks with beta in this range exhibit a smaller correlation to overall market moves.

What did we find?

Topping our list is Enbridge Income Fund Holdings Inc. This fund holds a variety of energy infrastructure assets in the United States and Canada, including both oil and natural gas pipelines. The fund has a very low forward P/E ratio of 13.3, beta of close to zero (meaning its price has virtually no correlation to the broader market) and pays a 6.8-percent dividend. Like many other pipeline stocks, the fund’s share price has suffered in 2017 resulting in very attractive valuation levels.

The lowest forward P/E on our list belongs to Element Fleet Management Corp., a provider of management services and financing for commercial vehicle and equipment fleets in Canada, the United States and abroad. The company is looking reasonably valued with a forward P/E of just 10 and a price-to-book ratio of 1.09. The stock has struggled in 2017 and is down about 22 percent year-to date.

The largest company on our list is telecom behemoth BCE Inc. with a market capitalization in excess of $53-billion. BCE also has low volatility (beta of 0.14) and an attractive dividend yield of 4.8 per cent. Like many utilities and other interest rate-sensitive stocks, the stock price has struggled since the spring when the Bank of Canada began raising interest rates.

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.