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(THINKSTOCK)
(THINKSTOCK)

NUMBER CRUNCHER

Energy, materials stocks fuel bargain portfolio Add to ...

Craig McGee is a senior consultant at Morningstar Canada.

What are we looking for?

Earlier this year, we identified how the market has been tilted toward rewarding value investors. That trend has continued, especially in Canada, and the CPMS Canadian Bargain model portfolio has risen to the top of our style-based strategies in 2014. So far this year, the Bargain model is up 20.4 per cent, fuelled significantly by the turnaround in the energy and materials sectors.

The screen

We looked for companies trading at lower price-to-book value ratios. Reported and expected earnings momentum is also used to help identify the potential turnaround in these stocks. Specifically, the CPMS Canadian database was ranked to find stocks with the best combination of the following metrics:

-price to book ratio;

-quarterly earnings momentum (QEM) – the percentage change in the latest four quarters’ earnings per share compared with the four quarters’ EPS of one quarter ago;

-estimated QEM for the upcoming quarter;

-revision of the current year’s consensus earnings estimate over the past three months;

-latest CPMS earnings surprise, which measures the percentage difference between the latest quarter’s CPMS-adjusted operating earnings and the consensus estimate.

Stocks with average trading volume in the lowest half of the database were screened out.

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 accompanying table shows the 15 top ranking stocks as measured by the Bargain strategy. The model itself holds up to 30 stocks based on the above criteria and this approach has proved to be volatile. Its annualized total return since inception in 1986 has matched that of the S&P/TSX composite at 8.6 per cent.

Over the past 12 months, this model has posted a return of 32.6 per cent versus 21.3 per cent for the index. Over the past five-year period, however, the model generated an annualized return of 7.8 per cent compared with 12.7 per cent for the index.

Top-ranking stocks in CPMS Canadian Bargain model portfolio

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