A peek at what goes into the Top 200

I’m hard at work on the 11th annual MoneySense Top 200, which will appear in the December 2014 edition of the magazine, due out Nov. 12.

I have to confess that it’s something of a minor miracle the feature has survived as long as it has. After all, the big crash of 2008 shook the faith of investors and it sent many businesses into turmoil. But, through thick and thin, everyone at MoneySense has been very understanding and supportive of the project.

While I know you’re eager to see this year’s list of top stocks, please be patient. It’ll be out soon. Until then, I thought you might like to see a little bit of what goes on behind the scenes.

This week I’ll focus on how we pick the stocks that go into the Top 200.

The process we use is simple enough. We opt for the largest 200 stocks that trade on the TSX. But we don’t use market capitalization (number of shares times price per share) as our measure of size. Instead we use revenue (over the last 12 months) as our guide.

As a result, the Top 200 skews away from resource firms that haven’t started producing anything and toward operating companies that actually sell products and services. That suits us just fine. After all, we prefer profitable firms that pay dividends.

Why did we opt for 200 stocks? While we are constrained by the amount of space available in the magazine, more importantly, there aren’t many reasonably-sized Canadian stocks to begin with.

If you sort the TSX by revenue, you’ll find only 34 companies with sales (over the last 12 months) of more than $10 billion. A mere 132 have revenues between $1 billion and $10 billion. The 200^th stock on the list generates only $0.7 billion in sales.

Alternately, if you sort the TSX based on market capitalization, you’ll find 45 large-cap firms that trade for more than $10 billion. Some 183 companies trade in the mid-cap range between $1 billion and $10 billion.

In other words, the Top 200 focuses primarily on large-cap and mid-cap stocks. While a few smaller fry sneak in, we like to stick with bigger firms.

Next time I’ll take a look at some of the tests we use in the Top 200 and highlight a few that were particularly hard to pass this year.

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 earning more than they pay in dividends. 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 Oct. 27. 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.

Notes

Source: Bloomberg, Oct. 27. 2014

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.)

New & Noteworthy

Avoid High Beta Stocks. Period.

Academic theory suggests that investors are rewarded for taking on risk. But, it turns out, high-beta stocks are risky and provide little in the way of return. They should be avoided.

Oddities

Pets Allowed

Having trouble flying your pig to Florida?  Just call it an “emotional support” animal and you can take it on the airplane with you. It’s a strange world.