The Farmers’ Almanac is legendary for making bold, sometimes ominous calls about the weather and the impending growing season. The annual publication is meant to entertain as much as it is to offer predictions, so few aside from gardeners and jittery couples planning their nuptials take it too seriously. Growth investors might want to look at this year’s crop of growth stocks with similar skepticism.
That’s not to say the list doesn’t have merit. Last year’s picks returned an average of 14%, beating the S&P/TSX composite index. The year before that, our picks returned 30%. The trouble this year is that there simply aren’t many companies in Canada that currently have the growth characteristics we’re looking for.
For this stock screen, we follow the straightforward approach that Wall Street legend Peter Lynch established in the early 1980s. Lynch’s method produced an average annual return of almost 30% over a stretch of 13 years. This method focuses on the price-to-earnings growth or PEG ratio, which is the company’s forward price-to-earnings ratio divided by that company’s future annual earnings per share growth rate. The lower the PEG ratio, the more a stock might be undervalued given its expected growth, which is why we search for companies with a ratio of less than 1.
This year, only five came in under that threshold. To round out the top 10, we included companies with PEG ratios as high as 1.4. Most investors would expect to see a growth list populated by high-flying tech companies, but by lowering the bar a notch, we netted blue chips like Royal Bank, hardly the sort of fast-growing company you’d normally see on this list. That may indicate that there are not many true growth opportunities out there right now.
Fewer opportunities, perhaps, but there are some, including George Weston. That’s right—this 132-year-old company is a growth stock according to Lynch’s definition. You can credit Weston’s purchase of Shoppers Drug Mart a little more than a year ago for making this company look like a much younger version of itself. Revenue, profit and margins have all been trending higher lately. Judging from its 0.5 PEG ratio, it’s safe to say that trend is expected to continue.
WestJet is another company that catches our attention, with a PEG ratio of 0.6. While the company is no longer a pesky startup, its management continues to find ways to maximize shareholder return while keeping a lid on costs.
After a one-year absence, Alimentation Couche-Tard returns to this list. Over the past five years, investors in this company have enjoyed 654% total return. So does Couche-Tard still have room to run? The slightly higher PEG ratio does suggest growth might be slowing, but given its aggressive acquisition history, it’s still one to watch.
The Top 10 Best Growth Stocks
|Alimentation Couche-Tard Inc.||ATD.B||6.8||1.4||38.3||133|
|Canadian Pacific Railway Ltd.||CP||7.9||1.2||28.3||51.9|
|Cogeco Cable Inc.||CCA||15.1||1||14.7||59.3|
|Lundin Mining Corp.||LUN||30.7||0.6||7.2||86.3|
|Peyto Exploration & Development Corp.||PEY||46.1||0.8||11.4||215.7|
|Royal Bank of Canada||RY||11.2||1.4||10.5||15.9|
|WestJet Airlines Ltd.||WJA||8.6||0.6||38.3||74.3|
|George Weston Ltd.||WN||30.8||0.5||20.5||38|