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Number Cruncher

Beaten down but looking up: Hunting for cheap stocks Add to ...

What are we looking for?

Cheap stocks with bright outlooks.

Beaten-up stocks enjoyed a bounce in the third quarter, so this seems an opportune time to look at stocks trading at bargain prices.

How we did it

Craig McGee, senior consultant at Morningstar Canada, delved into the Morningstar CPMS database to find U.S. stocks trading at low prices in comparison to their earnings.

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To further refine the list, he sought firms that have grown their earnings continuously, without any disappointments to the reported numbers or negative revisions to expectations for the future.

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 data cover more than 95 per cent of the investable North American stock market.

What we found

The accompanying chart shows the top 20 qualifying stocks in the CPMS U.S. Earnings Value model portfolio.

Since 1993, the U.S. Earnings Value strategy has produced a total return of 13 per cent a year, handily beating the S&P 500, which returned 8.3 per cent over the same period.

The strategy has done particularly well recently, posting a total return of 42 per cent in the 12 months ended Sept. 30. Investors should note, though, that no strategy works in all markets.

The particular attraction of the U.S. Earnings Value model is that it’s based on a simple idea: Buy cheap stocks. Over time, that usually works out pretty well.

 

The CPMS U.S. Earnings Value Model portfolio

Rank Company Symbol Mkt. cap. ($ mil.)
1 Western Digital Corp. WDC-Q 8,723
2 Prospect Capital Corp. PSEC-Q 1,968
3 Unisys Corp. UIS-N 914
4 Tesoro Corp. TSO-N 5,329
5 Phillips 66 PSX-N 28,575
6 HollyFrontier Corp. HFC-N 7,741
7 Alliant Techsystems Inc. ATK-N 1,847
8 Western Refining, Inc. WNR-N 2,287
9 Allstate Corp. ALL-N 20,493
10 CVR Energy Inc. CVI-N 3,261

Source: Morningstar Canada

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