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number cruncher

What are we looking for?

Canadian-listed companies that show consistent earnings growth and have exceeded analyst expectations in the most recent quarter.

The screen

As the third-quarter reporting season wraps up in Canada, I wanted to use this opportunity to highlight some of the companies that exceeded analyst expectations in the latest reporting period, but also have a history of consistent growing earnings. To achieve this, I created a strategy that ranks Canadian companies based on the following factors:

– earnings variability, which looks at the full history of each company's reported earnings and tracks how consistent they are over time (lower scores are preferred);

– latest quarterly earnings surprise, which compares the company's latest quarter of reported earnings against analysts' expectations;

– five-year earnings-per-share growth rate, which tracks the growth rate of reported earnings;

– three-month EPS estimate revision – a measure of analyst sentiment that compares the consensus estimate today with what it was three months ago.

To qualify, stocks must have a market cap of $650-million or more. In addition, stocks are only included if they are not set to report in the next 20 days (reflecting the fact that they have indeed reported their latest quarter of earnings recently).

More about Morningstar

Morningstar Research 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

I used CPMS to back-test the strategy from December, 1991, to October, 2015. During this process, 20 stocks were purchased and equally weighted with a maximum of five stocks a sector. Stocks would be sold if they fell outside the top 30 per cent of the ranked universe, or if the three-month estimate revision dropped by more than 15 per cent.

Over this period, the strategy produced an annualized total return of 12.7 per cent while the S&P/TSX composite total return index produced 8.3 per cent. It is also worthwhile to note that despite the recent market volatility, the strategy returned 7.9 per cent in the trailing 12-month period, while the S&P/TSX composite total return index lost 4.6 per cent.

The top 20 stocks that qualify today are listed in the accompanying table. As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.

Solid earnings growers that have exceeded analyst expectations