Best of all worlds

We screened every stock in the Canadian market using different criteria and found something for every type of investor.

Investors are always on the hunt for new ideas, and one of our jobs at Canadian Business is to provide them. When putting together our most recent Investor 500 ranking of Canada's largest publicly traded companies, published in May 2004, we screened the database of companies to find stocks that met different investment criteria. We came up with five rankings: growth stocks, value plays, defensive issues, turnarounds and quality trusts. For this issue, we reran the screens using data available from Thomson Baseline as of Dec. 31. The updated lists are shown below. Some companies on our original ranking didn't make the cut this time around (you can find the 2004 Investor 500 picks by clicking here. In the following charts, if a company is new to a list it has been marked as such; the stocks in our turnaround category are entirely new, but in all of the other lists there are holdovers from last year's Investor 500.

As with all screens, ours aren't perfect. Still, they provide a useful starting point for your own research. And while the stocks that passed our tests aren't guaranteed moneymakers, we're happy to report that all five of the lists outperformed their respective benchmarks over the past eight months. The total return for the TSX/S&P composite index over the period was 7.9%, but our turnarounds gained 11.1%, the growth stocks returned 13.3%, the defensive issues rose 14.3% and the value plays surged 17.3%. Meanwhile, the income funds that met our criteria outperformed the TSX/S&P capped income trust index, 21.4% to 16.9%.

Of course, the most we can say after just eight months of solid performance is that we got lucky. Check out this year's Investor 500 (published in May) to see the next update, and find out how our picks performed over a full year.

Best value stocks

Handle this group with caution. While each stock on the list trades below its industry average on both a price-to-earnings and price-to-book basis, has a price-to-book ratio no greater than 1.5 and boasts a five-year average return on equity greater than its industry mean, any one could also have an underlying problem that could financially burn you. So be sure to do your homework before you deem any of these undervalued. On a less ominous note, this screen found quite a few winners last spring. Of the 15 stocks on our previous value list, 12 appreciated in value by the end of the year, including natural resource firm Sherritt International. That company, which is making a return appearance on our list, jumped 46% in price. While the stock may still have legs, CIBC World Markets recently dropped its rating from Sector Outperformer to Sector Performer, in part because of its recent rise. Meanwhile, Kingsway Financial Services, a specialty provider of vehicle insurance in Canada and the United States, has recently shown progress with a problem it had hitting its numbers (note that it also appears on our list of growth stocks). Nevertheless, one analyst warns, “Consistent earnings for three successive quarters does not a track record create.” C.L.

Best growth stocks

Picking growth stocks may be an art, but using some science definitely helps. The stocks listed below passed the following tests: market cap greater than $500 million, average annual revenue and earnings growth rates greater than 20% over the past five years, and projected earnings per share growth greater than 10% over the next five years according to analysts polled by Thomson First Call. Alimentation Couche-Tard is once again on our list of potential high-flyers. Shares in the Montreal-based convenience-store operator have risen nearly 50% since we flagged it back in April of last year. Although the company continues to ring up increasing profits, it should be noted that over the past five months, analysts have twice downgraded their estimates of the future earnings growth rate. Of the five newcomers to the list, QLT looks particularly intriguing. The Vancouver-based bio-pharmaceutical company is a pioneer in the field of photodynamic therapy, a medical procedure that uses light-activated drugs to treat diseases. According to Morgan Stanley, Visudyne, the firm's lead commercial product, won't face competition in Europe and Japan until 2006 and 2007–a good enough reason to subject QLT to your own battery of tests. C.L.

Best turnarounds

Turnarounds can make for tricky investments. The “EPS next 12 months” numbers in the table below are the educated guesswork of analysts polled by Thomson First Call, who expect these companies to become profitable or post a 100% or greater earnings increase over the next 12 months. All of the firms are coming off a bad year in which they posted either negative earnings or declining profits. The rewards of placing the right bet here, though, can be great. Ipsco and Paramount Resources, two previous turnaround ideas, rocketed 121% and 113% in price, respectively. None of their counterparts from the Best Turnarounds in the 2004 Investor 500 came even remotely close to those numbers. In fact, only eight of the 19 turnaround companies from the previous list actually made money for investors over the past eight months, and some of those that didn't fell pretty hard (Bombardier dropped 63.2%, Dynatec shares declined 25.2% and FNX Mining's stock price fell 25.3%). Doing your due diligence on these firms can improve your odds, and patience will be required. You might want to start with Alliance Atlantis Communications, which broadcasts, creates and distributes filmed entertainment. According to Bloomberg, seven out of nine analysts give it a Buy rating. But don't forget: an earnings turnaround doesn't necessarily translate into a share price rebound; the stock should meet other tests of value before you invest. C.L.

Best defensive

For those who want to be in the market but don't have the stomach for some of its bigger swings, defensive stocks may be the way to go. Each company on our list has more than $1 billion in market cap and carries a beta of less than one (which suggests they are less risky than the market as a whole). All pay a dividend of at least 2%, have reasonable levels of debt and have returns on equity greater than 12%. On our previous list of 10 defensive stocks, three posted gains in the 20% range, including Enbridge and Rothmans. True to their nature, none of our previous 10 actually showed negative returns. The worst performing stock in the bunch, Royal Bank of Canada, returned 4.8% (including dividends). Bank of Nova Scotia remains on our list, and for good reason. Consistency counts when it comes to defensive stocks, and the bank was among the best in this group at hitting its earnings numbers over the past seven quarters, according to Thomson Baseline. Another comforting fact: Bank of Nova Scotia shares finished the year up for the fifth time in a row. C.L.

Best income

When choosing income trusts to invest in, it's critical to find firms with stable cash flows. We think the eight trusts in the table below merit further investigation. They do a better-than-average job converting sales to free cash flow and have returns on equity greater than 8%, according to Thomson Baseline. Most of them also have high levels of cash distribution stability relative to other income funds rated by Standard & Poor's or Dominion Bond Rating Service. Six trusts on the list are holdovers from the Investor 500 ranking published this past May, and they have performed admirably since then. The strongest performer, Davis + Henderson, generated a total return (capital gains plus cash yield) of 33.9% over the past eight months. Bell Nordiq Income Fund is up 30.1%, ARC Energy Trust gained 28.2% thanks to soaring energy prices and Northern Property REIT gained 26.1%. Meanwhile, the worst-performing trust, Canadian Apartment Properties REIT, returned a still respectable 11.9%. Two new names are on the Best Income list: Fort Chicago and Newalta. Fort Chicago operates an extensive network of gas pipelines, while Newalta has managed to generate steady cash flow from its oilfield service business. They're an indirect way to get in on the energy boom and could hold up even if oil and gas prices weaken over the coming year. P.V.