For most of us, picking stocks is as tricky as ordering a seven-course dinner at a swank new restaurant. We know that lots of items on the menu sound appetizing, but that's where our knowledge ends.
Rather than simply point and hope, smart diners look for a restaurant reviewer who can provide an expert opinion on the restaurant's offerings. To provide smart investors with a similar scouting report, we're pleased to present you with our candid take on all of Canada's largest stocks.
This is the fourth annual MoneySense Top 200 and we are pleased to say that connoisseurs have dined out very well on our past reviews. In each previous edition, we picked what we call All-Around All-Stars — stocks that score well on both our growth and value tests. Our All-Stars have consistently produced double-digit returns. The 2006 team achieved average returns of 16%, while the 2005 All-Stars gained 38%, and the 2004 squad soared an amazing 58%. An RRSP investor who put $10,000 into the 2004 picks and rolled his or her gains into the new All-Star team each subsequent year would now have $25,200. And those results don't include the generous dividends that we picked up along the way.
As you might imagine, we're delighted with our results. We want to stress, though, that picking stocks is an uncertain business. We don't expect to deliver double-digit returns all of the time. Indeed, we fully expect to lose money some years. Our 2006 All-Stars demonstrate how unpredictable the market can be. Our best pick, IPSCO, booked a 71% return before it was taken over by Swedish steel conglomerate SSAB. Our worst pick, Kingsway Financial, fell 23%, as the galloping loonie pummeled the value of the insurance company's U.S. operations. Smart investors should diversify their holdings and do their own research before arriving at a decision to buy.
To help you in your research, we've worked hard to produce a rating system that's easy to use, logical, and appealing to all types of investors. We think the Top 200 provides you with a more objective, more insightful look at large Canadian stocks than you're likely to find from any other single source. If you're looking for a sensible take on any large Canadian stock, you'll find the Top 200 to be an invaluable way to generate promising investment ideas.
To arrive at the Top 200, we begin by identifying the largest 200 companies in Canada by net sales. Using data supplied from Bloomberg, we evaluate each stock, first for its attractiveness as a value investment, then on its appeal as a growth investment. (Value investors like stocks that trade at low multiples of book value and pay juicy dividends. Growth investors like companies that are rapidly expanding their revenues and earnings.) Our value and growth screens employ sophisticated measures of financial merit, but in the end we reduce everything about a stock to two grades — one for value appeal, one for growth potential.
The grades work just like they did back when you were in school. Top-of-the-class stocks earn an A. Solid but uninspired students get by with a B or a C grade. Disappointments get sent home with a D or even an F.
Only a select group of stocks — those that manage to achieve at least one A and one B on both the value and the growth tests — qualify for our All-Around All-Stars. A mere seven stocks make the grade this year.
