Grading stocks for the Top 200

I’m pleased to say the Top 200 is fresh off the press and should be sent to subscribers in the coming days. But, if you want to get it quickly, just subscribe and you’ll be able to read it online ASAP.

Some of the tests we use in the Top 200 are particularly strict while appearing—at first glance—to be rather mild. But a large number of Canadian stocks fail to pass muster.

For instance, we favour profitable companies with some earnings over the last 12 months. While it doesn’t seem like much to ask for, roughly 50% of the stocks on the TSX failed to earn a dime over the last year.

As a result, it should come as no surprise that even fewer paid dividends. Indeed, only 44% of the stocks on the exchange sent money to their shareholders this year.

We also like companies with low-to-moderate price-to-sales ratios. But simply sticking to those with some sales eliminates roughly 20% of the companies on the TSX.

You might be wondering what sort of company has no sales and no earnings. Just think about junior mining ventures. They raise a pot of money and then spend it looking for minerals in the hopes of scoring big. Alas, all too many of them burn through their capital before finding anything of real value.

It turns out that our growth tests are particularly harsh. Only about 30% of the companies on the exchange sport some earnings growth over the last three years and roughly 45% saw some sales growth over the same period.

Thankfully, the tests aren’t entirely independent of each other. For instance, if a company has some earnings then chances are pretty good it also pays a dividend.

In addition, we pick the largest companies (by revenue) to include in the Top 200 and they generally have better characteristics than the small fry.  For instance, almost 85% of the largest firms managed to earned some money over the last 12 months and a similar number pay dividends.

Be sure to pick up a copy of the December edition of MoneySense to discover which stocks made the grade 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 Nov. 10. 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

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

How Concentrated Should You Make Your Value Portfolio?

Patrick O’Shaughnessy, money manager and author of the recently published Millennial Money, notes that some diversification is good but too much drags down returns.

Just For Frugal Fun

Shepherd’s pie and other Canadian comfort food

If you’re looking for a little comfort food to combat the November blues, take a look at Bonnie Stern’s recipes for depression cake, shepherd’s pie, and banana bread.