Craig McGee is a senior consultant at Morningstar Canada.
What are we looking for?
A portfolio of U.S. industry outperformers.
As market growth continues to slow, I wanted to look for a set of U.S. large caps with better-than-industry value and growth characteristics and I turned to the CPMS U.S. Industry Relative model portfolio.
The screen
The strategy ranks and screens on both profitability and value criteria that are measured against each stock's industry group. Earnings momentum, estimate revisions and earnings surprises are also emphasized. The actual model tracks the performance of up to 40 stocks but we'll narrow our results to the top 20.
Specifically, I searched the CPMS U.S. equity database for the 20 stocks with the best combination of the following metrics:
– market cap (large caps are emphasized);
– industry-relative price to book;
– industry-relative return on equity;
– industry-relative price momentum (nine-month price change relative to industry included in the table);
– industry-relative revision of the consensus EPS estimate over the past three months;
– quarterly earnings momentum (QEM – the rate of change of earnings over the past four quarters versus one quarter ago) must not be negative.
Tweaking the live model, I set a constraint so P/B must be less than the industry median and ROE must be greater than the industry median. On a day-to-day basis, stocks are reranked and positions are held until they no longer rank in the top 30 per cent.
More about Morningstar
Morningstar Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.
What we found
Over the 12 months ended Sept. 30, 2014, the 40-stock model generated a total return of 21.2 per cent versus 19.7 per cent for the S&P 500 Total Return Index. Since inception on Dec. 31, 1993, this strategy, following a strict discipline, would have generated an annualized total return of 12.8 per cent while the index came in at 9.3 per cent.
As always, investors are advised to do their own research before investing in any of the stocks shown here.