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Screening for Top Stocks to Own in 2018

I regularly screen for value stocks that exhibit some highly attractive qualities that tend to predict outperformance.

These stocks may not necessarily be in favour with the market, but they have some fundamental qualities that make them attractive buys. At the very least, they’re worth considering.

First, I’ll go over the parameters. I screen for companies that have strong cash flow growth, low debt, a low valuation, and a high return on equity.

As an example, Labrador Iron Ore Royalty (TSX:LIF) first started ranking high on my screening list back in 2015, when it was trading at roughly $13. But it had a dividend yield of close to 10%, and so I looked into it.

The iron ore industry was not booming, and iron ore prices had been decimated, with most experts saying that increasing supply will keep this commodity going lower for the foreseeable future.

But being a royalty company, and given that it receives royalties from high-grade iron ore production, it seemed like a low-risk, quality way to play this theme. I mean, if growth in China remained strong, then iron ore would surely recover.

Three years and many dividend payments later, Labrador Iron Ore’s stock price has more than doubled, and investors have benefited not only from its regular dividend payments, but also from special dividend payments.

The company has increased its dividend several times in the last two years, and it has paid special dividends that have amounted to $1.65 per share in 2017 alone.

So, all told, shareholders have received dividends of $2.65 in 2017 for an actual dividend yield (regular dividend plus special dividends) of 10.2% in 2017 based on today’s share price.

Industrial Alliance Insur. & Fin. Ser. (TSX:IAG) ranks high on the screen at this time, as is West Fraser Timber Co.Ltd. (TSX:WFT).

While Industrial Alliance is pretty much a domestic operator and has a slower growth profile than some of the international locations, such as Asia, the insurance business is growing nicely, and the recent acquisition of HollisWealth should help drive growth going forward.

And in my view, the stock trades at a multiple that reflects this. It has a P/E multiple of 12 compared to the peer group, which trades at multiples of +14 times.

Importantly, the company stands to gain the most of its peer group from rising interest rates; a 10-basis-point increase in interest rates will impact net income by $15 million.

West Fraser is the lowest-cost lumber producer in North America. Its 2017 results show an acceleration of cash flow generation, margins, and revenue, as the home-building market in the U.S. continues its steady pace of recovery.

Cash flow from operations of $856 million increased 24% in 2017, and free cash flow increased 25% to $520 million. And the dividend was increased 28.5% to $0.36 per share off these strong results.

While U.S. duties remain an overhang, and the stock has significantly outperformed the market in the last year, the company remains well positioned to continue its run.

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Fool contributor Karen Thomas has no position in any of the stocks mentioned.

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