The current market environment has investors positioned for an extended period of slower growth and low-but-stable interest rates. As the North American markets have become somewhat overheated, it will be more challenging to uncover top performers going forward. In a market such as this, stock-pickers may be rewarded by focusing their attention on relatively undervalued firms with competitive advantages that provide sustainable profitability and earnings growth.
Using CPMS -- Morningstar's quantitative equity screening tool for institutional investors and financial advisors -- I filtered the Canadian and U.S. databases for stocks that display a good combination of low price-to-sales ratios, low price-to-earnings ratios and high return on equity relative to their historical norms. Among the stocks that share these traits, three are currently rated four or five stars by Morningstar's equity analysts.
Suncor is Canada's leading integrated oil and gas producer. It develops, produces and markets crude oil and natural gas in Canada and internationally; the company also transports and refines crude oil and markets petroleum and petrochemical products primarily in Canada. Its operations have been generating superior refining margins, and it has been able to charge higher prices for what it produces, As well, its integration of upstream operations with the downstream allows for the production of more valuable products. SU is currently trading at about 10.7 times forward earnings and 1.6 times sales, both of which are still significantly lower than historical valuations despite the stock's strength over the past year. Additionally, the company has had an excellent track record of increasing dividends, and its yield (currently at 2.3%) has become more attractive in recent years.
Western Union Company is a global money transfer and payment services provider. As the industry leader, it has been able to develop significant cost and pricing advantages due to its immense agent network and brand strength, and it enjoys industry-best operating margins as a result. With strong and stable profitability, Western Union is able to generate high free cash flows and continues to be in a good position to maintain and increase its dividend. Its current dividend yield of 3.2% offers investors a reasonable payout, and with a forward price-to-earnings ratio of 10.8, WU appears to be significantly undervalued in its space.
Catamaran Corp. CCT/ CTRX
Catamaran is a provider of pharmacy benefit management (PBM) and healthcare information technology solutions designed to assist its customers in reducing the cost and managing the complexity of their prescription drug programs. The company is one of the largest players in the PBM industry, and this allows for decent supplier pricing leverage and centralized cost scale advantages. Catamaran appears to be positioned well as health care spending is expected to grow robustly due to the aging population and the expansion of health insurance coverage. Following its recent pullback, CCT is trading at 18.4 times expected 2014 earnings and appears to be very attractively valued relative to its own history and also to industry peers, including heavyweights CVS Caremark Corp. CVS and Express Scripts ESRX.