Quality stocks in undervalued sectors of the Canadian market

Investors often overlook certain sectors of the market, particularly those that do not fall into the high-profile categories of energy or basic materials. However, hidden within these overlooked areas are quality stocks that possess strong fundamentals and substantial growth potential. By exploring these sectors, investors can uncover valuable opportunities that may lead to significant returns.

Identifying Quality Stocks in Undervalued Sectors

The S&P/TSX Composite Index predominantly features companies from the energy and basic materials sectors, which together represent around 30% of the index. While these sectors have been the focus of recent analyses, it is crucial to shift our gaze towards the less visible yet promising areas of the Canadian market. Here, we can find quality businesses that demonstrate resilience and solid performance.

Many of these companies operate with conservative balance sheets and maintain sound financial practices. Investors seeking to diversify their portfolios should consider exploring these often-ignored sectors, where unique opportunities await.

Stock Screening Methodology

To identify potential investment candidates, we utilized Trading Central’s Strategy Builder, a sophisticated screening tool designed to evaluate TSX-listed companies. Our screening process focused on several key criteria to ensure we selected businesses with strong fundamentals:

• A minimum TC Quantamental Rating of 55, which assesses a company's quality, value, income, and momentum.
• A minimum market capitalization of $1 billion, ensuring that we focus on established companies.
• A minimum stock price of $10 to filter out penny stocks.
• A maximum debt-to-equity ratio of 1.0 to promote financial discipline.
• Inclusion of the price-to-earnings (P/E) ratio to provide context for valuation.

Applying these criteria yielded a list of ten companies across various sectors, including retail, industrials, financial services, asset management, consumer staples, and technology.

Overview of Trading Central

Trading Central is a prominent player in the realm of financial market research and investment analytics. Their offerings are tailored for both retail brokers and institutional investors, providing actionable trading ideas based on extensive research. Among their tools is the Strategy Builder, a stock screener that enables users to generate potential investment opportunities based on both technical and fundamental analyses.

The versatility of Trading Central's products allows investors to explore a wide array of financial instruments, including stocks, exchange-traded funds (ETFs), commodities, and options. This breadth of analysis can assist investors in making informed decisions.

Highlighted Investment Opportunities

Among the companies that emerged from our screening process, a few stand out for their impressive growth metrics and strong market positions:

Aritzia Inc.

Aritzia Inc. is a Vancouver-based retailer specializing in women's fashion. The company boasts a TC Quantamental Rating of 60, with remarkable growth (84) and quality (73) subscores. Key highlights include:

• An earnings-per-share (EPS) growth rate of 84%.
• A return on equity of 30%.
• A current market capitalization of $17.15 billion, reflecting its position as a significant player in the market.

Shares have increased by 26.4% year-to-date, and Trading Central projects a one-year target price of $145. Aritzia is also featured in the Trading Central Quant Canadian 50 Index ETF.

Sun Life Financial Inc.

As one of Canada’s largest diversified insurance and financial services companies, Sun Life Financial Inc. commands a market capitalization of $55.14 billion. The company has earned a TC Quantamental Rating of 60, driven by robust growth (81) and solid quality (62) subscores:

• An EPS growth of 202% in the last quarter.
• A return on equity of 14%.
• A P/E ratio of 16.18, indicating reasonable valuation.

The stock offers a dividend yield of 3.62%, adding an attractive income component, and has seen a 15.3% increase in share price year-to-date. The projected one-year target price is $97.50.

Maple Leaf Foods Inc.

Maple Leaf Foods Inc. stands out as a leading packaged meat and food company in Canada. With a TC Quantamental Rating of 61, the company showcases:

• A stellar return on equity of 38%.
• EPS showing strong year-over-year recovery.
• A dividend yield of 3.13%, appealing to income-focused investors.

Shares are trading near record highs, having increased by 24% year-to-date, and the one-year target price is set at $31.20.

Evaluating Investment Strategies with Historical Data

The Trading Central Strategy Builder also provides back-testing capabilities, allowing investors to assess how well a given investment strategy would have performed historically. For instance, utilizing a five-year historical period with quarterly rebalancing, our screening method yielded an impressive hypothetical annualized return of 21%. In comparison, the S&P/TSX Composite Index experienced a return of only 12% over the same period.

Accessing Investment Opportunities Through Indexed ETFs

The investment ideas revealed here can be explored further through the newly launched Trading Central Quant Canada 50 Equity Index ETF. This ETF tracks the Solactive TC Quant Canadian 50 Index and is built on the multifactor framework used in our screening process. Investors benefit from a rules-based approach that maintains disciplined exposure to Canadian equities, particularly valuable during volatile market conditions.

It is essential to note that the investment ideas presented are for informational purposes only and do not represent specific advice or recommendations. Investors are encouraged to conduct thorough research before making investment decisions.

Gary Christie serves as the head of North American research at Trading Central in Ottawa.