A Simple Stock Screen for Small Quality with Value

Small Quality with Value

I run a stock screen every once in awhile in my TD Discount Brokerage account. It’s a simple screen with three inputs. The screen focuses on stocks that trade in Canada.

Market Cap………………$49.2 million and up (size of company)

Price / Cash Flow Ratio…15.2 and under            (value)

Return on Capital………..9.7 % and up               (quality)

The screen turned up 35 stocks as of Saturday morning July 8 2017. I eliminated all financial stocks as return on capital isn’t the proper measure for these types of stocks. I then eliminated all preferred shares that showed up. I then checked the ‘cash return’ on the remaining stocks in the screen. The cash return tells an investor how much free cash flow a company is generating relative to the cost of buying the whole company, including its debt burden. To calculate cash return, add free cash flow (cash flow from operations, minus capital expenditures) to net interest expense (interest expense minus interest income). That’s the top half of the ratio. The bottom half is called “enterprise value”, which is the company’s market capitalization (equity) plus long-term debt, minus any cash on the balance sheet.

I cherry picked the remaining stocks insisting that their cash return was greater than the yield of the 10 year Canadian Bond. The great thing about the cash return of a stock is that you can compare its yield to the ongoing risk free rate (10 year bond) and hence get a sense of the value it is offering you as an investor.

The results…drum roll please are as below…

Magellan Aerospace Corp                   MAL

Intertape Polymer Group Inc              ITP

High Arctic Energy Services Inc        HWO

Rocky Mountain Dealerships Inc       RME

Geodrill Ltd                                        GEO

Pacific Insight Electronics Corp         PIH

PFB Corp                                            PFB

Now I’m not suggesting you run out and buy these stocks sight unseen. There is no reason to rush in and start buying immediately, especially now that the current market is looking somewhat toppy. But it might be a good idea to start researching some of these stocks as potential investment ideas. Try visiting their website and get a sense of what they are about. Is it easy to access the information you want? It should be. Put an emphasis on transparency. If you are not sure about something put it aside and try going back to it later, or just move on to the next investment idea. No one has a clock on you. Relax, in the end its just a game and money is just a way of keeping score. 

All of the numbers that were used in generating this list of stocks came from a static past. See if you can unearth a dynamic piece of information that might act as a catalyst for an investment down the road. The stocks in this list are smaller but are efficiently run and offering good value. Chances are the big investing institutions won't be able to invest in them because of their size. But we can and that is part of the edge we have on the investing establishment.


An additional insight...This screen only came up with 35 stocks, most of which were small caps (small caps fall under the market's radar more readily). That's a fairly low number for this screen indicating to me that the over all market is getting pretty pricey.