What are we looking for?
Stocks for the nervous.
Low-volatility funds have soared in popularity recently as anxiety-prone investors seek portfolios that won’t dip and dive with every ripple in the market. Most of these funds, though, focus on a single measure of volatility.
With the co-operation of Craig McGee, senior consultant at Morningstar Canada, we went looking for Canadian stocks that are steady performers on a number of key metrics.
How we did it
Mr. McGee used the CPMS Canadian database to search for stocks with low volatility in three vital areas: share price, past earnings and future earnings. Specifically, he screened for the top 15 stocks based on:
-A three-year beta less than 1 (beta is used to measure a stock’s volatility; a stock with a beta under 1 tends to move less than the overall market);
-A CPMS grade between A+ and C+ for absolute price volatility (this grade measures the standard deviation of daily returns over the past year; an A+ grade indicates the stocks with lowest volatility);
-A CPMS grade between A+ and C+ for the standard deviation of earnings per share over the past five years;
-A CPMS grade between A+ and C+ for the spread in current year EPS estimates (an A+ grade on this score indicates a low spread);
-A CPMS grade between A+ and C+ for the spread in next year’s EPS estimates.
To ensure adequate diversification, Mr. McGee permitted no more than three stocks from any single sector.
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
Mr. McGee looked at how this strategy would have fared from January, 1999, to the end of 2012, assuming the stocks in the portfolio were reselected each year.
He found that the low volatility strategy would have produced an annualized total return of 10.7 per cent, compared with 6.9 per cent for the S&P/TSX Composite Total Return Index.
“This type of strategy is geared more toward downside protection so it would be likely to underperform when riskier assets are in favour,” says Mr. McGee.
For safety seeking investors, though, it’s definitely worth a look.
Canadian low-volatility stocks
|2||Shoppers Drug Mart||SC-T||8,697|
|4||Bank of Nova Scotia||BNS-T||71,626|
|5||Tim Hortons Inc.||THI-T||7,623|
|7||Cdn. National Railway||CNR-T||42,867|
|8||Cdn. Utilities Ltd., A||CU-T||9,886|
|10||Jean Coutu Group, A||PJC.A-T||1,586|
Grades relative to 732 stocks in CPMS Canadian Database (A = good, E = poor). Source: Morningstar Canada
1-yr Std Dev
of Daily Returns
|2||Shoppers Drug Mart||SC-T||8,697||2.68%||0.36||A+||A+||A+||A+|
|4||Bank of Nova Scotia||BNS-T||71,626||3.78%||0.65||A+||A+||A+||A+|
|5||Tim Hortons Inc.||THI-T||7,623||2.09%||0.15||A-||A+||A+||A+|
|7||Cdn. National Railway||CNR-T||42,867||1.72%||0.38||A+||A+||A+||A+|
|8||Cdn. Utilities Ltd., A||CU-T||9,886||2.52%||0.11||A-||A+||A+||A-|
|10||Jean Coutu Group, A||PJC.A-T||1,586||1.79%||0.12||A-||A+||A+||A+|
|12||Atco Ltd., I||ACO.X-T||5,131||1.68%||0.39||A-||A+||A+||A+|
|13||Cdn. Tire Corp. Ltd.||CTC.A-T||5,571||2.04%||0.47||A-||A-||A+||A+|
|15||Bell Aliant Inc.||BA-T||6,133||7.06%||0.03||A+||A-||A-||A-|