Quality Canadian stocks for the long haul

The Globe and Mail, Number Cruncher

By Peter Ashton

In this article, Peter Ashton writes about the quality of Canadian stocks for the long haul.

What are we looking for?

Canadian large-cap stocks with profitable and efficient businesses. World stock markets have enjoyed a strong performance over the past eight years with the current bull market now among the longest in modern history. Many investors have reasonably begun to wonder how much longer the current bull market has to run and how they might best position themselves in the event of a correction or bear market. In this environment, picking quality stocks for the long haul takes on increasing importance. Large, established companies that generate consistent profits with low operating costs provide a margin of safety for conservative investors.

The screen

We will be using Strategy Builder to search for profitable and efficient Canadian large-cap stocks. We begin by setting a minimum market-capitalization threshold of $5-billion to focus on larger, more stable and established companies in the market.

Next, we will look for companies with an operating margin of at least 20 per cent. Operating margin is a measure of a company’s profitability, which shows how much profit a company makes on each dollar of revenue. Next, we will look for companies with a return on sales of at least 30 per cent. Return on sales is defined as the company’s income after taxes divided by revenue and expressed as a percentage.

Finally, in order to focus on companies with scalable business models, we will select only firms with revenue for every employee of at least $500,000. Companies with higher revenue per employee amounts are better able to scale their businesses without adding new costs.

What did we find?

Royal Bank of Canada tops our list with a market cap of $136- billion and a dividend yield of 3.7 per cent. The stock has been fairly flat in 2017 despite beating analyst expectations for earnings in both its first- and second-quarter reporting periods.

Restaurant Brands International Inc. was formed in 2014 through the merger of Burger King and Tim Hortons and expanded in 2017 through the acquisition of Popeyes Louisiana Kitchen. The company’s stock has had a good run over the past year, up 30.7 per cent in the past 12 months and 19.2 per cent year to date.

Canadian National Railway Co. enjoys the highest operating margin (43.9 per cent) and highest return on sales (44.6 per cent) of any company on our list. In late July, the company reported second-quarter results that reported earnings up 24 per cent from a year ago and its highest quarterly revenue on record. Continuing low energy costs should contribute to further gains in future quarters.

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.