What are we looking for?
An update on the U.S. growth-stock strategy that we outlined on Dec. 13. Our notion back then was to search for American stocks with attractive outlooks and improving profitability.
More about today's screen
Craig McGee, senior consultant at CPMS Morningstar Canada, created the screen. He ranked 2,271 U.S. companies on a variety of criteria, and selected the top 20 stocks with a market cap greater than $1-billion (U.S.). To guard against too much focus on any single industry, he allowed no more than five stocks from any one sector.
The criteria he examined were:
four-year average return on equity (ROE);
three-month consensus 2012 earnings-per-share (EPS) estimate revisions;
Annual rate of change of ROE;
Annual rate of change of EPS;
Annual rate of change of revenue;
Annual rate of change of operating cash flow;
Change in net margin.
The chart shows how each stock ranked versus the other U.S. stocks in the CPMS universe. A is best. E is worst.
More about CPMS
CPMS, a division of Morningstar Canada, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers through software and Web-based tools. It covers more than 700 Canadian and 2,200 U.S. stocks, and adjusts for unusual accounting items in each company's quarterly results to make sure screens can perform correctly.
What did we find out?
Stocks with growing earnings can shine. If an investor had created a portfolio on Dec. 13 with equal amounts of each of the 20 stocks mentioned in this column, and held it until March 9, the total return would have been 17.32 per cent. During the same period, the S&P 500 Total Return Index produced 12.44 per cent.
Would-be investors should be aware, however, that growth stocks go in and out of favour. They have done well as the economic outlook has brightened in recent months, but there is no guarantee they will continue to do so. Research any stock before buying.