Craig McGee is a senior consultant at Morningstar Canada.
What we’re looking for
Potential bargains in the U.S. market.
The CPMS U.S. Earnings Value model portfolio currently leads our selection of U.S. strategies with a total return of 11.9 per cent so far in 2014, compared with 3.4 per cent for the S&P 500.
The strategy is designed for investors focused on valuation. The emphasis is on stocks trading at low price-to-reported-earnings multiples, but the model also looks for growing earnings and rising expectations.
The strategy looks for stocks with the best combination of the following criteria:
-Price to earnings;
-Quarterly earnings momentum (QEM), that is, the percentage change in the latest four quarters’ earnings per share (EPS) compared with the four quarters’ EPS of one quarter ago;
-Estimated quarterly earnings momentum for the upcoming quarter;
-The number of upward revisions of the current year’s consensus earnings estimate over the past three months.
Firms with higher earnings surprises over the past four quarters are also favoured.
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 did we find?
The 20 top-ranking stocks currently held by the model are shown in the table.
Over the 12-month period ended April 30, 2014, the U.S. Earnings Value model posted a total return of 49.6 per cent versus 20.4 per cent for the S&P 500. Since inception in 1994, the strategy has generated an annualized total return of 15.3 per cent while the index came in at 9.2 per cent.
Top-ranking stocks in CPMS U.S. Earnings value model portfolio
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