What are we looking for
Low beta providers that have surprised analysts in the most recent quarter.
The screen
As we wrap up fourth-quarter earnings season in Canada for most companies in the TSX, active investors on the Street are likely looking for companies that have exceeded analyst expectations. This week, I use CPMS to look for such companies while keeping in mind their historical volatility.
To achieve this, I created a strategy that ranks stocks on two factors:
- Latest earnings surprise (this is the latest reported EPS figure from the company, compared against the consensus estimate from the Street just prior to the company’s report. Morningstar CPMS adds a proprietary calculation to this figure by decaying the value based on the length of time that has passed since the company has reported, and the historical volatility of the company’s reported earnings);
- Five-year historic beta (beta measures the historic sensitivity of the stock’s price movement relative to the S&P/TSX composite index. A company with a beta less than 1 has historically moved less than the benchmark in trending markets, and in this case, is preferred for reduced portfolio volatility).
To qualify, companies must have at least active analysts covering the stock, and a market cap of at least $850-million. This figure represents the top third of stocks by market cap in the CPMS database today, which consists of 720 companies.
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 Morningstar CPMS to backtest this strategy from December, 1991, to February, 2017. During this process, a maximum of 15 stocks were purchased with a maximum of 3 stocks per economic sector. Stocks are sold if their rank falls below the top 30 per cent of the universe. When sold, their positions were replaced with the highest ranked stock not already owned in the portfolio, keeping in mind the aforementioned sector limits. Over this period, the strategy produced an annualized total return of 15.7 per cent while the S&P/TSX total return index produced 8.6 per cent. The stocks that qualify for purchase today are listed in the table above.
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.