Investors want portfolios that will withstand the full economic cycle — both the crests and troughs.

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To choose sustainable stocks, Rory Ronan, portfolio manager at CIBC Asset Management and manager of the Renaissance Canadian Dividend Fund, looks for high-quality businesses that are run by top management teams and that are trading at attractive valuations.

This bottom-up approach means “we do rigorous financial analysis on each individual name we consider for the portfolio,” he says.

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For companies to fit the bill, they must have a good track record of generating high returns on investment throughout the economic cycle. “We’re looking for companies that generate a lot of free cash flow, have very good growth prospects, and where the industry forecasts look very positive,” Ronan adds.

Further, management teams should “have a lot of skin in the game,” meaning they should invest their own money in their companies to align their interests with those of shareholders.

For valuations, an important metric is discounted cash flow. “We try to determine how much free cash flow a company will generate through a full economic cycle, [then] we discount that back to today and make any necessary balance sheet adjustments,” says Ronan.

Winning names

Toromont Industries is one company he favours.

Why? “It’s a very well-run company that has a high return on invested capital and good margin throughout the cycle,” says Ronan. A Caterpillar dealer, Toromont benefits from mining sector business, and infrastructure and construction spending, he adds.

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Plus, at the end of August, the company acquired Hewitt Equipment, the Caterpillar dealer for Quebec, Western Labrador and the Maritimes, for just over $1 billion. And, says Ronan, Toromont Industries was “able to finance that [deal] almost all with cash and debt — very little equity.” He describes the strategic acquistion as “accretive for shareholders over the next three to five years.”

He also likes engineering and construction firm WSP Global. “They have expanded their geographic footprint over the last several years from just being a Canadian company to expanding into the U.S. and Europe, and they have very good growth prospects ahead of them,” he explains.