An All-Star review

I’m hard at work on this year’s Top 200 list of Canadian stocks. If all goes to plan, it will be posted online—for free—right here at MoneySense.ca in the very near future.

SKIP AHEAD Safer Canadian Dogs

But I’m pleased to say that last year’s crop of top stocks fared well. The average All-Star stock (those that earned at least one A and one B for their value and growth appeal) gained 13.5%. By way of comparison, the market (as represented by the XIC exchange traded fund) gained 7.1% over the same period. The All-Stars beat the market by 6.4 percentage points.

Over the long term, the All-Stars advanced by an average of 14.6% per year since we started way back in 2004. The market moved up by an average of 4.8% per year over the same period. The All-Stars beat the index by a whopping 9.8 percentage points on average annually.

Mind you, those figures do not include dividends. The actual returns were even better.

I always like to step back and look at the market as a whole before focusing in on the best names. To do so, I use median market metrics instead of averages because medians are less influenced by the extremes. (You’ll remember that the median is the middle point of the group. So, the median return is the point at which half the returns are higher and half are lower.)

On the valuation front, the median Canadian stock trades at 1.54 times book value and at 19.9 times earnings. Those figures are based on stocks with positive figures. Some 96% of Canadian firms currently have positive book values and 57% sport positive earnings.

That’s a touch higher than last year’s readings when the median stock traded at 1.49 times book value and 18.7 times earnings. Back then 96% of firms had positive book values and only 45% had positive earnings.

Momentum slowed down this year. The median stock advanced 5.0% over the last 12 months whereas a year earlier the median gain (over the prior 12 months) was 14.8%. This year some 55% of stocks gained ground over the last 12 months whereas last year 65% did so.

The combination of rising stock valuations and slowing momentum is a potentially worrying one.

But growth heated up a bit. Last year 36% firms sported positive 3-year sales-per-share growth and 27% had positive 3-year earnings-per-share growth. This year those figures climbed to 37% and 36% respectively.

I don’t know if growth, valuation, or momentum will win the day over the next year. But we are well into a long bull market and it is worth being prepared—at least psychologically—for the possibility of a pull back. After all, bear markets have a habit of striking from time to time. That’s why it’s a good idea to make sure you’ve taken on a level of risk that is appropriate for you.

Safer Canadian Dogs

Investors following the Dogs of the Dow strategy want to buy the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), hold them for a year, and then move into the new list of top yielders.

The Dogs of the TSX works the same way but swaps the DJIA for the S&P/TSX 60, which contains 60 of the largest stocks in Canada.

My safer variant of the Dogs of the TSX tracks the 10 stocks in the index with the highest dividend yields provided they also pass a series of safety tests, such as having positive earnings. The idea is to weed out companies that might cut their dividends in the near term. Just be warned, it’s a task that’s easier said than done.

Here’s the updated Safer Dogs of the TSX, representing the top yielders as of June 8. The list is a good starting point for those who want to put some money to work this week. Just keep in mind, the idea is to hold the stocks for at least a year after purchase – barring some calamity.

Source: Bloomberg as of October 25, 2017

Notes

Price: Closing price per share

P/B: Price to Book Value Ratio

P/E: Price to Earnings Ratio

Earnings Yield: Earnings divided by Price, expressed as a percentage

Dividend Yield: Expected-Annual-Dividend divided by Price, expressed as a percentage

As always, do your due diligence before buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently. Remember, stocks can be risky. So, be careful out there. (Norm may own shares of some, or all, of the stocks mentioned here.)

Norm Rothery on common mistakes investors make

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