What are we looking for?
Over the past two years, economic uncertainty was high, with concerns about recession and rising interest rates potentially leading to financial collapse. But that outcome didn’t materialize. While some companies were cautious, cutting back on capital expenditures, others saw opportunities.
Now, with interest rates starting to decline and expected to boost economic growth, these forward-thinking companies could emerge as the big winners.
Today, we’ll dive into those brave companies that took on substantial capital investments to secure future gains.
The screen
We screened Canadian stocks using the following criteria:
- market capitalization greater than $1-billion;
- Stockpointer (SP) score greater than 60. The scores mainly consider risk-adjusted return-on-capital, earnings-per-share growth, free cash flow-per-share and risk metrics such as valuation and leverage. The score varies between zero and 100. A score of 60 or more implies an above-average performing company;
- capital growth in the past 24 months greater than 10 per cent. Capital is defined as the book value plus the interest-bearing debt and leases plus proprietary adjustments;
- five-year average return on capital (ROC) greater than 8 per cent. We seek out companies with a strong track record of strategic capital investments
- positive ROC change in the last 24 months ;
For informational purposes, we have also included dividend yield and one-year price return.
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What we found
RB Global Inc. RBA-T increased capital allocation by 439.9 per cent over two years, including a $7.3-billion acquisition of IIA Inc. in November, 2022. While return-on-capital rose only 0.7 per cent in the past two years, the significant increase in capital employed at a solid five-year average ROC of 17.8 per cent is appealing. These robust metrics contribute to a remarkable SP score of 77. The company will release its thrid-quarter earnings on Nov. 8 before the market opens.
Brookfield Infrastructure Corp. BIPC-T owns and operates infrastructure assets worldwide, focusing on utilities, transport, energy, and data. Over the past two years, it has significantly ramped up its invested capital by 199.3 per cent, mostly through its acquisition of Tritton international Ltd. for US$ 4.7-billion. This deal, possibly combined with other factors, resulted in a notable 1.8-per-cent increase in its ROC. The company released its financial results on Wednesday.
Hammond Power Solutions Inc. HPS-A-T known for manufacturing dry-type transformers and related magnetics for emerging electric technologies. It boasts the third-highest SP score at 76. The company had a great last two years and reinvested most of it in its operations, leading to a notable two-year capital growth rate of 39.3 per cent. Additionally, HPS achieved an impressive one-year price return of 68 per cent, underscoring its formidable past performance. However, following the release of its third-quarter financial statement on Oct. 29, the stock declined by 6 per cent, suggesting that investors had higher expectations for this quarter.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
For more details about these stocks, subscribe to the Inovestor for Advisors platform for free.
Anthony Ménard, CFA, is vice-president of data management at Inovestor.
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