What are we looking for?
Predictability. With profits.
The goal today is to find stocks that offer growth at a reasonable price.
These stocks typically represent companies with records of expanding revenues and earnings.
How we did it
Our friend Craig McGee, senior consultant at Morningstar Canada, provided us with a peek inside Morningstar’s Predictable Growth model.
The model looks for stocks that offer good value based on their price-to-earnings ratios.
It also favours stocks with rising book values and earnings growth that doesn’t vary too much.
Finally, it likes stocks that have high re-investment rates – essentially a measure of how much of the company’s earnings are being plowed back into the organization, providing the fuel for future growth.
To find the stocks in today’s list, Mr. McGee screened all Canadian stocks, but dropped ones that fell in the bottom half of the market based on their average monthly trading volumes.
This tilts the field in favour of larger, more liquid companies.
The Predictable Growth strategy is based on a portfolio of 30 stocks. The list shows the top 15.
More about Morningstar
Morningstar Inc. provides independent investment research in North America, Europe, Australia and Asia.
Its investment research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers.
CPMS figures cover more than 95 per cent of the investable North American stock market.
What we found
A well diversified list of non-obvious contenders that includes both investment bank GMP Capital and T-shirt maker Gildan Activewear.
Mr. McGee says the CPMS Predictable Growth model is leading his firm’s Canadian strategies so far this year with a return of 8.1 per cent, well above the 3.2-per-cent gain in the TSX composite. Since its inception on Dec. 31, 1985, the model has posted a annualized total return of 13.8 per cent compared with 8.3 per cent for the index.
As always, you should do your own research before buying any of the stocks listed here.
Top 15 stocks in CPMS Predictable Growth Portfolio
|6||Home Capital Group||HCG-T||8.3x|
|7||CCL Industries Inc., B||CCL.B-T||17.4x|
|9||Sun Life Financial Inc.||SLF-T||11.3x|
|10||Genworth MI Canada Inc.||MIC-T||7.5x|
* Grades relative to 733 stocks in the CPMS Canadian universe; A = low variability, E = high variability. Source: Morningstar Canada
|6||Home Capital Group||HCG-T||8.3x||23.6%||A+||14.8%|
|7||CCL Industries Inc., B||CCL.B-T||17.4x||9.7%||A+||48.4%|
|9||Sun Life Financial Inc.||SLF-T||11.3x||5.1%||B+||12.4%|
|10||Genworth MI Canada Inc.||MIC-T||7.5x||6.5%||B+||20.6%|
|11||GMP Capital Inc.||GMP-T||14.2x||8.6%||B-||33.3%|
|13||Quebecor Inc., B||QBR.B-T||10.3x||15.7%||A-||20.4%|
|14||WestJet Airlines Ltd.||WJA-T||10.7x||14.4%||B+||17.7%|
|15||Open Text Corporation||OTC-T||10.3x||26.1%||B+||10.8%|
- Canaccord Genuity Group Inc$4.12-0.04(-0.96%)
- Industrial Alliance Insurance and Financial Services Inc$41.97-0.15(-0.36%)
- MacDonald Dettwiler and Associates Ltd$88.06-0.62(-0.70%)
- Home Capital Group Inc$37.98-0.22(-0.58%)
- CCL Industries Inc$230.11-1.14(-0.49%)
- Gildan Activewear Inc$38.85-0.89(-2.24%)
- Sun Life Financial Inc$43.02-0.38(-0.88%)
- Genworth MI Canada Inc$32.20-0.02(-0.06%)
- GMP Capital Inc$4.94-0.05(-1.00%)
- Stantec Inc$32.45-0.05(-0.15%)
- Quebecor Inc$33.28-0.47(-1.39%)
- WestJet Airlines Ltd$20.53-0.40(-1.91%)
- Open Text Corp$70.32+2.08(+3.05%)
- Updated April 28 4:00 PM EDT. Delayed by at least 15 minutes.