A Review of Stock Ideas from 2017

A Review of Stock Ideas from 2017

Last year I covered twelve stock ideas. Two of the ideas I stole from money managers I follow in the states (GIMO and DHR, both on the NYSE, although GIMO has been since bought out). Another one (GUY on the TSX) was an idea I came up with, while trying to find an investment idea in the under-valued junior gold market in Canada. The remaining nine ideas I got from a stock screen I use on the Canadian market. I want to focus on this screen for the moment and discuss my reasons for deploying it.

Cheap Canadian Small Caps Screen

Market Cap……………………49.2 million to 5.48 billion

Price / Cash Flow Ratio……….under 15.2

Return on Capital (TTM)……..over 10 percent

By screening for stocks in the smaller cap sector of the market I’m hoping to exploit market inefficiencies where the market has trouble properly valuing these companies. (wager value)

The price to cash flow ratio is a far better metric to use to value companies than the heavily followed and sometimes manipulated price to earnings ratio. (margin of safety)

Lastly, return on capital assures me that I will only be considering companies that are actually adding value to their businesses over time. (quality and value creation)

To avoid value traps I like to see revenue growth over the last few years and a strong balance sheet to help assure me that the company will be able to navigate periods where credit may be hard to obtain. I also like to see some free cash flow (I use the cash return metric to track this) and finally a strong motivated management team that holds a significant stock ownership in the company. A proven track record of capital allocation is also preferred...In addition, I also check out the price to sales ratio of the likely candidates, if it is below say 1.5 times, it is a confirming indicator of value (margin of safety) and thus makes the qualifying stocks all the more valuable.

The object of a stock screen is to give the investor ideas to conduct some research on, not to pick stocks from outright. By focusing on a pre-selected menu of stocks, the investor will be able to cut through the noise and clutter of the market and hone in on good potential investment ideas. He can also tailor the stock screen to reflect his investment approach or philosophy. 

Below is the list of the nine stocks I cherry picked from this screen last year with the dates selected and the initial return so far. Of course its still too early to make any judgements so far but its always fun to see how they are doing in the interm.

Stock	2017	Price						% return/loss
GEO	Jul-31	1.98		Jan-23	2.10		0.12	6.06
MAL	Aug-01	19.91		Jan-23	20.86		0.95	4.77
HWO	Aug-02	3.71		Jan-23	4.16		0.45	12.13
RME	Aug-07	10.41		Jan-23	12.92		2.51	24.11
TCS	Aug-24	13.15		Jan-23	18.44		5.29	40.23
SXP	Sep-23	4.46		Jan-23	4.65		0.19	4.26
MTO	Oct-01	0.77		Jan-23	0.77		0	0.00
TPK	Oct-05	6.18		Jan-23	6.72		0.54	8.74
CAL	Oct-06	7.3		Jan-23	9.4		2.1	28.77
Total								14.34

In addition, this particular stock screen could give insights into how expensive the overall market is. Back in the summer this screen yielded me 30 entries in total. This past weekend it threw off only 18 stocks and was as low as 16 just a few weeks ago. This indicates to me that this is an expensive market.