Number Cruncher: health care, industrials and tech: 10 top-ranked stocks

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What are we looking for?
 

The 10 highest ranking stocks in some of Canada’s most innovation-dependent sectors: health care, industrials and technology (HITs). Rankings are determined by the INK Edge V.I.P. criteria (valuations, insider commitment and price momentum). This is the same approach we apply across the broad market to determine membership for the INK Canadian Insider Index, which is used by the Horizons Canadian Insider Index ETF (HII).

Not to be confused with the illegal practice of “insider trading,” insider commitment refers to the legally reported buying, selling and ownership of shares in a corporation by an officer or director.

 

The screen

Our universe includes some 800 TSX-listed stocks that meet minimum size and liquidity requirements. To make the final grade, a stock in the group must trade over $3 and have a market cap of at least $250 million. We begin by determining a stock’s rank in each V.I.P. category based on equally weighted factors.

 

Valuations (past 12 months except dividend yield)
 
– price-to-earnings, price-to-book and price-to-sales ratios;
– enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization);
– price-to-cash flow or price-to-cash;
– shareholder yield (buybacks plus dividends).
 
Insider (officer and director) commitment
 
– recent net insider buying;
– personal holdings (excludes shares held for other investors);
– insider intensity, based on the number of insiders buying.
 
Price momentum
 
– based on three-, six- and 12-month returns.
 
Next, each V.I.P. category rank is equally weighted to determine a composite ranking.
 
In context
 
The percentile V.I.P. category and composite rankings of the top 10 are shown versus all other stocks in the market. Rankings are between 0 and 100 – the higher the better. A composite ranking over 90 goes into the top decile “sunny” category. A composite ranking between 70 and 90 goes into the next two deciles, or the “mostly sunny” category. Keep in mind that even if a stock is in the sunny category, it could still rain on your portfolio’s parade. Diversification remains key.
 
What we found
 
Chorus Aviation Inc. leads the pack. Chorus provides Air Canada feeder and regional services through its Jazz operations. The stock ranks in the top 10 per cent of all stocks on the basis of price momentum, and in the top 30 per cent on the basis of attractive valuations. On the other hand, of the top 10 stocks, it ranks lowest on insider commitment. Nevertheless, given that the stock is up more than 60 per cent over the past year, the fact that insiders remain modest accumulators is a positive signal.
 
April 2015 Number Cruncher: Top 10 HITS



Rank Stock Ticker Price
1 Chorus Aviation Inc. CHR $5.96
2 The Intertain Group Limited IT $16.28
3 Enghouse Systems Limited ESL $52.55
4 Neovasc Inc. NVC $11.00
5 Extendicare Inc. EXE $7.72
6 Magellan Aerospace Corporation MAL $13.73
7 Transcontinental Inc. TCL $17.44
8 Toromont Industries Ltd. TIH $33.93
9 Velan Inc. VLN $18.90
10 Valeant Pharmaceuticals International  Inc. VRX $252.82
Screen run on April 10, 2015, share prices as of April 15, 2015.
 
Another aerospace-space industrial name to make the list is INK Canadian Insider Index member Magellan Aerospace Corp. The aircraft component maker’s rankings are boosted by the holdings of board chair Murray Edwards who owns more than 70 per cent of the company’s shares.
 
Intertain Group Ltd. takes second spot. It also has the highest insider ranking. In third spot is enterprise software solutions firm Enghouse Systems.
 
Cardiovascular device maker Neovasc Inc. is the top ranked health-care name and takes fourth spot. The stock falls in the bottom 10 per cent in terms of valuations, a distinction which is also shared by the two stocks above it in the rankings. Tenth-spot Valeant Pharmaceuticals International Inc. also ranks very low on valuations. Unfortunately, momentum at a reasonable price is usually hard to find, which makes our top-ranked stock all the more distinct.
 
Investors should conduct further research before buying any of the companies listed here.
 
A version of this blog originally appeared online and in print the print edition of the Globe and Mail April 17, 2015.
 
 

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