Revealed: These Canadian Stocks Passed The Now Infamous 'Buffett Screen'

Your author is still on vacation. This post was written in advance, meaning certain information or figures may be slightly out of date.

As mentioned during Tuesday’s link roundup, I found the idea of the Buffett Screen to be intriguing.

To remind everyone, the Buffett Screen is based on conversations Berkshire Hathaway money manager Todd Combs has with his boss, Warren Buffett. It looks for S&P 500 companies that:

• Are under 15x forward earnings

• Have a high probability of increasing earnings over the next 5 years

• Have a 50/50 chance of compounding 7% per year

The easy part is finding companies that trade under 15x forward earnings, of course. The other two are much more subjective in nature. Those qualities are what makes investing fun.

I decided to spend a little time seeing if I could replicate the results of this screen by looking at Canadian stocks. After playing around with the screening tool on Tikr I’ve come up with something I think is a pretty reasonable proxy to what Buffett and Combs discuss. Let’s take a closer look.

The screen criteria

The first criteria is easy. We’re limiting the search to TSX stocks. You can choose to put a market cap requirement on it if you want, but I didn’t want to exclude smaller stocks just because of their size.

Next I searched for stocks trading under 16x earnings (to catch any that are borderline between 15x and 16x forward earnings) and stocks that are trading above a 0 forward P/E. This takes out any unprofitable names.

My next step may be a little controversial, but I stripped out any energy or materials names. This is not a knock on either sector; after all, your author owns several energy names. But I’m not convinced I can predict commodity prices with any degree of certainty over the next five years. Therefore, these sectors don’t pass the ‘high probability of increasing earnings over the next 5 years’ screen.

Finally, to approximate the 50% chance of compound growth I simply looked backwards as a place to start. I added criteria to limit the screen to stocks that have reported a 7% annual growth in EPS from 2017 to 2021.

Here it is, in all its glory. My Canadian version of the Buffett screen:

Ta-dah!

Run that bad boy and you get 63 different results, which is a pretty good sized universe to start.

Before I get into the stocks that made the list, let me tell you about the stocks that didn’t make the list. Because there are quite a few familiar names there.

Some of the odd stocks out include:

• Scotiabank

• CIBC

• BCE

• Telus

• Rogers Communications

• Air Canada (duh)

• Enbridge (likely because I stripped out energy)

• TC Energy (ditto)

• All the Brookfield subsidiaries

This list helps reveal a flaw in the screen, one you might try to correct if you run it on your own. It looks at earnings per share despite free cash flow being the better way to value certain companies. So keep that in mind if you don’t see your favourite name on this screen.

A link to the whole spreadsheet

First, let me link to a spreadsheet I made of the entire screen. So those of you who are interested in seeing all 63 names can have a boo.

Link to the entire screen

I’ll also do a quick profile of a few different names I found on the screen that I think are worthy of more investigation. Look for full posts on many of these names in the future.

MTY Food Group

MTY Food Group (TSX:MTY) is a consolidator of North American fast food brands. The company owns names like Jugo Juice, Mr. Sub, Mucho Burrito, Pizza Delight, Papa Murphy’s, South Street Burger, TacoTime, and, for the Quebec readers, Valentine. Hot diggity does Valentine have the best poutine.

And those are just a few of the brands the company controls. It has dozens more, actively looking for small or medium-sized restaurant chains to gobble up.

The company has delivered excellent growth over the last decade plus and looks poised to continue that into the future. And shares trade at about 14x forward earnings. A cheap valuation plus what I view as a high chance of earnings growth going forward checks off our major boxes.

MTY just increased its dividend by 19%. Shares yield 1.6%.

Intact Financial

Next up is Intact Financial Corporation (TSX:IFC), which just barely made the list with a 15.99x forward P/E multiple. I’ve liked and owned Intact for a while because this P&C insurer has consistently posted better underwriting results than its competition. This translates into Intact making money from underwriting alone, never mind the returns it gets on its investment portfolio.

Intact has been quietly acquiring assets outside of Canada, expanding first into the United States and then into Great Britain. This acquisitions have grown both the top and bottom lines nicely, and I think they can replicate the success of these deals a bunch more times going forward, never mind their ability to increase prices to existing customers.

Intact has a nice record of increasing its dividend since the company’s 2009 IPO. Shares currently have a 2% yield.

Alaris Equity Partners

Alaris Equity Partners (TSX:AD.UN) provides capital to private companies in exchange for a preferred share and a monthly income stream. These investments also tend to come with growth bonuses, which increases the payout based on overall sales.

Yes, this is an economically sensitive business, but it has survived a few different recessions now without any huge issues. Investors are more than compensated for this risk through Alaris’s robust deal pipeline and a product structured to both minimize downside in the case of poor results and maximize upside when the underlying investment does well.

Alaris has a 7.5% yield, which is high enough to scare off many investors. The company also cut the dividend during the pandemic. But it raised the payout in both 2021 and 2022, and currently has a payout ratio of approximately 50%. This is another stock I’m fairly confident will grow earnings five years from now.

Great-West Lifeco

The market likes steady growth. A company that can accurately predict 5-10% growth every year will always be preferred to one that offers something much more lumpier. This inconsistency is one of the reasons why Great-West Lifeco (TSX:GWO) consistently trades at such an attractive valuation. The stock has a current P/E ratio of around 10x.

Hell, it’s the reason why Manulife is so cheap too, but we don’t need to get into that right now.

Here’s a quick look at GWO’s earnings per share growth since 2016, with analyst estimates for 2023 and 2024 thrown in for good measure.

2016 - $2.692017 - $2.672018 - $2.992019 - $2.942020 - $2.882021 - $3.512022 - $3.392023 - $3.60 (E)2024 - $3.76 (E)

See what I’m talking about? It seems like every time Great-West Lifeco takes a step forward, it takes half a step back.

This can be frustrating for long-term holders, but the company is quietly compounding wealth in the background and slowly paying out ever-increasing dividends. The current payout is $1.96 per year, good enough for a 5.7% yield. The payout ratio is under 60%, too.

Quebecor

A couple people who I follow on Twitter are bullish on Quebecor Inc. (TSX:QBR.A), and it’s easy to see why. The company consistently trades at a cheaper valuation than its larger peers, has a more attractive payout ratio, and is poised to expand nationally with its pending acquisition of Freedom Mobile from Shaw.

Quebecor is a force to be reckoned with in its home province. It has consistently grown its wireless business; these days it has some 1.7M customers. Wireless accounts for approximately 30% of the company’s total business. The other parts aren’t growing quite as strongly, but they’re holding up every bit as well as competitors’ offerings.

The Freedom Mobile deal looks to be a pretty good one. Quebecor is paying approximately 7x EBITDA for the asset, or $2.85B. But Shaw spent $5B to get Freedom to the point where it is today. As part of the deal, Quebecor also secured a deal with Rogers to allow Freedom customers to roam on its network while Quebecor builds out a true nationwide fourth wireless carrier.

Quebecor trades at 12x forward earnings and pays a nice dividend of 3.8%. The dividend has increased substantially over the last decade, with the payout going from $0.0125 to $0.30 per quarter since 2012. Look for another increase in 2023 as well.

The bottom line

This Buffett screen is an excellent place to start, and I’m impressed there were 63 Canadian stocks that made the list. This illustrates something I’ve been saying for some time now — Canada is littered with good quality inexpensive stocks.

And the list could get even bigger if you play around with it a little more.

I’ve highlighted a few that I think are worthy of further research, and I’ll be looking more into the names I don’t currently own. Hopefully y’all got some good ideas from this exercise as well.

Disclosure: author owns shares of MTY Food Group, Intact Financial, Alaris, and Great-West Lifeco, either directly or via accounts managed for family members.