Friday, 8 February 2013

15 Canadian Stocks to Provide Either Thrills or Spills

Perhaps you are a speculator, wanting to make large profits quickly. Or maybe you just want to invest in stable stocks and avoid the stocks with the widest potential price swings. Small capitalization stocks are often thought of as being volatile while bigger companies are seen as being stable but many large cap stocks are also quite volatile. Let's get specific and try to pin down the Canadian mainstream stocks most likely to power ahead, or drop precipitously.

Finding the Volatile Stocks
Using the TMX Money stock screener we extracted a spreadsheet of the 199 largest cap stocks trading on Toronto's TSX. These stocks comprise the vast majority of the TSX Composite Index's 244 stocks, which covers 95% of the public Canadian equities market. Then we combined the following factors to paint a picture of volatility and uncertainty:
  • Beta - This is a statistical measure of the sensitivity a stock's price has had relative to the market average, which is 1.0 by definition (see Investopedia video on Beta). A Beta above 1 means the stock has been more volatile than the market (in this case the TSX average), the higher the number the more volatile it has been. We took the Beta over the past 60 months (from the TMX Money screener's extra columns) and focussed on stocks with Beta of 1.5 or more. We also obtained the Beta for the past 36 months from the Globe and Mail's My WatchList to get an idea of shorter term volatility.
  • 52 week spread - This is the difference between the highest and the lowest price during the past year, which gives us an idea of even more recent volatility.
  • Price/Earnings ratio (P/E) - When a stock has a high P/E, it relatively richly valued. If the market's implicit high expectations of earnings growth are not met, there is danger of a big downward price move. Companies that have net losses over the trailing twelve months show up as N/A in the table. For comparison, we note that TSX Composite has an average P/E of 14.1 currently. Some of our volatile stocks have P/E's much more than double.
  • Short interest ratio - The number of shares sold short divided by the average daily trading volume gives a notion of how many speculators think the stock is going down. The higher the number, the more numerous and hungry the vultures, a sign of potential danger (see Investopedia article on Short Interest)
  • Stocks analysts love or hate - We recently posted a review and list of those stocks in, or out of, favour. To the extent professional analysts reflect or influence investor thinking, a matter which we previously noted needs to be considered with a grain of salt, it is worth throwing that data into our mix.
  • Analyst Earnings Per Share estimate spread - Another useful piece of information from those same analysts is the dispersion of their EPS forecasts, as we explained here. From that post we took the stocks that had the greatest degree of disagreement among analysts. Those stocks have the most true uncertainty and are likely to produce the greatest positive or negative surprises with consequent effects on stock price, i.e. more volatility.
Putting it all together, we took the top 15 stocks with four or more of the above high volatility indicators to give us an overall picture. We note that there are more extreme numbers amongst the remaining TSX stocks for any single measure but we feel the overall combination gives a bit more strength to the idea that the future of these stocks is likely to match past volatility.

The 15 stocks most likely provide thrills and spills
Perhaps no surprise, there are lots of energy and mining companies in our table.
  1. Tahoe Resources Inc. (TSX: THO) - Analysts love the stock but short sellers have massively put their money on the line against it. Who will be right?
  2. PetroBakken Energy Ltd. (PBN) - PBN been extremely volatile for years and probably will continue to be so. The high P/E reinforces the warning sign. Anyone want to try day trading?
  3. MEG Energy Corp. (MEG) - Another stock that pits loving analysts vs short sellers
  4. Athabasca Oil Corporation (ATH) - Ditto for ATH
  5. New Gold Inc. (NGD) - Another volatile, richly-priced stock but this time there's no analyst fan club
  6. BlackBerry, formerly Research In Motion Limited (BB) - We all know about newly renamed BlackBerry if we read a newspaper or watch the news so no doubt we all have our own opinion or guess as to the company's future, which seems to be hanging in the balance. This time, it's the other way way round, with analysts uniformly negative on the stock while short sellers are notably quite cautious. 
  7. Turquoise Hill Resources Ltd. (TRQ) - There are lots of short sellers and the company is losing money. This might be called a longshot for an investor who thinks of going long on the stock.
  8. Westport Innovations Inc. (WPT) - A change of pace, both analysts and short sellers think negatively about this stock!
  9. Nexen Inc. (NXY) - For such a large company (27th largest company in Canada), there is huge uncertainty about its financial prospects as the analyst EPS estimate dispersion shows.
  10. Walter Energy, Inc. (WLT) - No earnings, sales declining and volatile, not a pretty picture
  11. Precision Drilling Corporation (PD) - This stock is interesting with its low P/E, low short interest but high EPS estimate dispersion. Seems to be a solid company but its earnings vary wildly, a case of true uncertainty. Maybe a value stock to investigate?
  12. Coeur d'Alene Mines Corporation (CDM) - Optimistic investors have hung on as the company reported a large decline in its last quarterly earnings, obviously expecting a big rebound. If not, an astronomic P/E of 94.5 is crazy.
  13. Uranium One Inc. (UUU) - Another mining company scraping along the bottom with net losses and an understandably volatile stock
  14. Inmet Mining Corporation (IMN) - A takeover bid often does create a lot of stock price volatility as the battle unfolds.
  15. Suncor Energy Inc. (SU) - Here is an unusual occurrence, a giant company, the 4th largest in Canada by market cap, that is extremely volatile, more than most in the energy sector. It has continued to pump out profits and positive cash flow. Its P/E is fairly low at 11.1 and analysts love it - could they be right in this case?

Though our above commentary suggests that we have preliminary notions about the likely direction, whether up or down, of some of these stocks, in most cases it looks more like a coin flip than a good bet. However, it remains a highly uncertain and risky call to make, and is only for those with a strong taste for risk. One thing we do feel is fairly certain, the good or bad consequences will be pronounced.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.


The Blunt Bean Counter said...

Interesting list, especially Suncor. Should I be scared it looks like my regular portfolio :) 

CanadianInvestor said...

BBC, I had actually thought of buying Suncor for my own portfolio before doing this post but now the volatility has put me off.