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Number Cruncher

A disciplined defence for challenging times Add to ...

What are we looking for?

A defensive strategy for volatile markets.

More about today’s screen

Back in 2008, Morningstar CPMS helped us look at which stocks survived the sharp downturn the best and why. Today, we’ll revisit this defensive strategy and screen for the following features:

– Relatively high liquidity – stocks whose floats (the market capitalization of freely traded shares) were in the bottom quarter of the overall market were excluded;

More related to this story

– High-yields – stocks with dividend yields above 1 per cent;

– Low earnings and price volatility – stable, consistent earnings with no negative estimate revisions (analysts cutting earnings estimates);

-reasonable valuations – low price-to-book and price-to-sales ratios.

CPMS updated its 30-stock portfolio running buy and sell criteria each month – stocks could also be sold after their dividend was suspended or earnings estimates fell too much. The portfolio was capped at five stocks per sector but no minimums were in place.

More about CPMS

CPMS is an equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 680 of the largest and more liquid Canadian stocks, plus more than 2,100 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company’s quarterly results to make sure screens can perform correctly.

What did we find?

Craig McGee, a senior consultant with CPMS, ran the numbers and found this strategy has returned 14.7 per cent since the end of 1985, versus 8.5 per cent for the S&P/TSX total return index.

The portfolio fell only 15 per cent in 2008, while the S&P/TSX total return benchmark index fell 33 per cent. In 2009, it rose 22 per cent, while the benchmark rose 35 per cent.

“The strategy shines during challenging times but struggles to keep up when markets take off,” Mr. McGee said. More specifically, it has a one-in-two chance of beating the benchmark in years when the benchmark is rising. When the benchmark is falling, the strategy has an 86-per-cent chance of outperforming.

“This type of strategy works because it spreads out the risk across different stocks and sectors and also follows a strict discipline,” Mr. McGee added.

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