TD Canadian Small-cap Model Portfolio Canadian Small-cap Model Portfolio
Stock Screen
We are adding Hammond Power Solutions Inc. (HPS.A) and WELL Health Technologies Corp. (WELL), both at a 3.0% portfolio weighting. We are also removing our holdings in Andlauer Healthcare Group Ltd. (AND, portfolio weight 2.7%) and Cogeco Communications Inc. (CCA, portfolio weight 2.8%).
With the Q1/F23 earnings season completed, we thought we would take a fresh look at how earnings momentum within the Canadian small-/mid-cap universe has changed over the past quarter. To do so, we have developed a screen, which we detail in Exhibit 1. In the list of qualifying* names, we have measured the change in earnings momentum by including the three-month revisions to both calendar 2023 (column B) and calendar 2024 (column C) consensus earnings. We highlight positive revisions of more than 2.0% in green. We then rank each name on their three-month change in 12-month forward earnings (column D). The purpose of this screen is to identify names with strong expected earnings growth that was driven higher over the most recent quarter on upward estimate revisions. As market confirmation is always important to us, we have included price change over the past three months (column A) in our screen.
Below, we detail our two portfolio additions.
Hammond Power (new portfolio weight 3.0%, Exhibit 2): Ranked highly in our screen, Hammond Power's 12-month forward earnings have surged 53.0% over the past three months, with upward revisions to both 2023 (+50.0%) and 2024 (+57.0%) consensus earnings and positive price change over the quarter (59.8%). Although price gains have been quite strong (+59.8% in the last three months), with its strong underlying earnings growth, Hammond Power is trading at an undemanding forward P/E of 8.9x. A manufacturer of transformers, Hammond Power has also posted eight consecutive quarters of rising year-over-year revenue growth.
WELL Health (new portfolio weight 3.0%, Exhibit 3): Like Hammond Power, WELL Health also ranks near the top of our screen, with a positive change of 24.2% in 12-month forward earnings over the past three months. After a parabolic rise through the pandemic and peaking in early-2021, WELL Health gave back most of these share-price gains before bottoming early this year. WELL Health's rally year-to-date has been supported by rapidly increasing forward earnings, led by the 75.0% boost in the 2024 consensus estimate from three months ago. Presently trading at 16.0x 12-month forward earnings and with revenues rising every quarter (y/y) since the pandemic, we are adding WELL Health on its recent pullback in share price.
*We have excluded the majority of groups within the commodity-dependent energy and materials sectors, as well as the REITs (AFFO-dependent) and alternative energy (not earnings driven) sub-sectors. To minimize outliers and enhance the reliability of the screen, we have excluded names with low or negative earnings (i.e. <$0.20) and those that have less than three contributing earnings estimates. Market cap must be between $200MM and $5B.
Other highly ranked names that are also held in our quantitative small-cap portfolio are listed below.
Docebo Inc. (DCBO, current portfolio weight 5.3%, Exhibit 4):
Although Docebo fell nearly 17% following its Q1/F23 earnings, estimates were widely raised. These upward revisions continued what was already a positive earnings momentum trend for Docebo. Over the past three months, 2023 consensus earnings have risen 34.5% and 2024 consensus earnings are up 50.6%. As a result, we have increased our position in Docebo on the post-earnings share-price weakness.
MDA Ltd. (MDA, current portfolio weight 3.1%, Exhibit 5): A Canadian space technology company, MDA posted strong Q1/F23 results last month, leading to an acceleration in its 12-month forward earnings momentum.June 5, 2023