Searching for the Next Great Canadian Stock

By Ari Charney • March 5, 2013 • Canadian Edge Weekly

As an investor, one of my favorite idea-generation tools is to examine the portfolios of top-performing mutual funds to see which stocks were recently purchased, as well as which stocks are most commonly held. Although our Canadian Edge coverage universe has well over 150 stocks, there’s always the possibility that there are other Canadian stocks that have the potential to deliver market-beating gains along with rising dividends.

With that in mind, I used Morningstar’s Premium Fund Screener to identify the international funds with the best performances. Although long-term outperformance is paramount when assessing the quality of a mutual fund, a database screener enables us to make seemingly impossible demands, such as funds that beat the market over both short-term periods and long-term periods.

Unfortunately, I couldn’t narrow my selections to funds that specialize in Canada or have outsize weightings in Canadian stocks. So I opted to screen for diversified international funds that beat the MSCI World Index ex-US–a benchmark that tracks the performance of a couple dozen developed-world markets–over the one-year, three-year, five-year, 10-year and 15-year trailing time periods. Additionally, these funds had to rank in the top 10 percent of their respective Morningstar style categories over the three-year, five-year and 10-year trailing time periods.

The six mutual funds that made the cut are as follows:

  • AllianzGI Global Small-Cap Institutional (DGSCX)
  • MassMutual Premier International (MIEDX)
  • MFS International Value (MGIAX)
  • Oakmark International (OAKIX)
  • Oppenheimer International Growth (OIGAX)
  • Tweedy, Browne Global Value (TBGVX)

When I analyze mutual funds for our other newsletter services, I normally try to find no-load mutual funds that are open to all retail investors and have low investment minimums. But I removed those criteria in order to find the best funds, regardless of whether they’re strictly for institutional investors or carry a sales charge. Among the names on this list, OAKIX and TBGVX are the only two funds that don’t have a load and are widely available to retail investors.

As for the portfolios of these six funds, I was surprised to fund very few holdings domiciled in Canada. In fact, just one Canadian stock is held in common by more than one fund: Shoppers Drug Mart Corp (TSX: SC, OTC: SHDMF), Canada’s leading retail drugstore chain, with more than 1,300 stores. 

The company is among the top holdings of both MIEDX and OIGAX. And both funds boosted their positions in the stock during their most recent reporting period. MIEDX bumped its position by nearly 7 percent to 1.6 percent of assets, while OIGAX increased its holdings by just over 9 percent to 1.4 percent of assets. The funds first added shares of the stock to their portfolios during the second quarter of 2010, presumably around the time the stock was trading near five-year lows in the low- to mid-30s. Shares of the stock currently trade near CAD43.

Although Shoppers Drug Mart fills roughly 20 percent of Canada’s prescriptions, it does face significant regulatory headwinds. In particular, it will likely suffer margin erosion as the result of Canadian provincial governments’ power to regulate pharmacy prices.

For example, provincial governments have cut reimbursement rates for generic prescriptions, just as a number of drugs have gone off patent. That means higher sales of generics won’t translate into a higher bottom line. However, the ability of other players–such as supermarkets with in-store pharmacies–to steal market share by undercutting on price is limited by these same price controls.

Beyond that, the company does enjoy ample scale in a highly fragmented industry, where about 50 percent of drugstores are independent. And similar to the demographic situation in the US, the company could also benefit from a wave of aging retirees.

Still, Shoppers Drug Mart appears to be a slow grower at best. Analysts forecast earnings to rise just 1.7 percent year over year in 2013, and another 6.4 percent in 2014. Just seven of the 17 analysts that track the stock rate it a “buy,” while another nine rate it a “hold,” with one “sell” rating. The 12-month consensus price target is CAD44.63, a 6.3 percent rise from where the stock trades presently.

Such meager expectations have left the stock trading at just 0.8 times sales. Its shares currently yield 2.7 percent, with a conservative payout ratio of 35 percent. In addition to growing the dividend 10.6 percent annually over the past five years, the board has authorized an ongoing share repurchase program, under which the company expects to buy back 5 percent of shares outstanding over the next year.

At the end of the fourth quarter, Shoppers Drug Mart has CAD105 million in cash on its balance sheet and CAD247 million in long-term debt.

The relatively conservative stock trades with nearly 50 percent less volatility than the broad market. Indeed, the low on its 52-week trading range is just 11.5 percent below the high.

But even with a relatively decent dividend, the company’s slow growth doesn’t make for a particularly compelling investment. Although the stock posted enviable gains during the early part of last decade, it’s returned just 1.3 percent annually over the past three years.

So it’s hard to imagine what the management teams of OIGAX and MIEDX still see in Shoppers Drug Mart aside from a steady payout underpinned by a stock that more or less holds its value. In these uncertain times, perhaps that’s good enough.

The Roundup

Following are confirmed and estimated announcement dates for those Portfolio Holdings that have yet to report results. Links will take you to analysis of numbers from those that have reported.

Conservative Holdings

Aggressive Holdings

  • Acadian Timber Corp (TSX: ADN OTC: ACAZF)–Feb. 13 Flash Alert
  • Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–March 14 (confirmed)
  • ARC Resources Ltd (TSX: ARX, OTC: AETUF)–February In Focus
  • Atlantic Power Corp (TSX: ATP, NYSE: AT)–March 1 Flash Alert I, March 1 Flash Alert II
  • Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–Feb. 22 Flash Alert
  • Colabor Group Inc (TSX: GCL, OTC: COLFF)–March 22 (estimate)
  • Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–March 15 (estimate)
  • Extendicare Inc (TSX: EXE, OTC: EXETF)–March 1 Flash Alert II
  • IBI Group Inc (TSX: IBG, OTC: IBIBF)–March 26 (estimate)
  • Just Energy Group Inc (TSX: JE, NYSE: JE)–February Best Buy
  • Newalta Corp (TSX: NAL, OTC: NWLTF)–Feb. 15 Flash Alert
  • Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–Feb. 13 Flash Alert
  • Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–Feb. 27 Flash Alert
  • PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF)–March 7 (estimate)
  • Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–March 7 (estimate)
  • Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–March 4 (confirmed)
  • Wajax Corp (TSX: WJX, OTC: WJXFF)–March 6 (estimate)

Stock Talk

Comments Guidelines

Add New Comments

You must be logged in to post to Stock Talk OR create an account