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number cruncher

What are we looking for?

Searching for companies with strong price and earnings momentum amid the market turbulence.

The screen

During the past year investors have seen a lot of volatility in the market caused by a multitude of economic, political and geographical drivers, the latest being the Brexit announcement. Many stocks in the market have been strongly affected, showing dramatic price decreases or at the very least a roller-coaster performance. And yet, some companies managed to maintain strong price momentum despite the adverse conditions. In today's strategy, we are looking not only for companies whose stock price performed well, but also whose earnings remain strong and stable.

This strategy ranks stocks based on the best combination of:

  • Estimate revision of current year consensus earnings per share from one quarter ago;
  • Variability of historical EPS (volatility of a company’s reported EPS on a quarterly basis. It uses the company’s entire history of quarterly earnings) – a low figure is preferred;
  • Quarterly earnings surprise (proprietary measure of the percentage difference between actual and expected earnings);
  • Quarterly earnings momentum (rate of change of quarterly operating earnings per share);
  • Price change relative to month-end – three, six and nine months ago.

Qualifying companies have a market float greater than $750-million, and value of shares traded last month is over $1.5-million. They have positive quarterly earnings momentum, estimate revisions greater than negative 3.3, and earnings variability less than 10.

More about 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

I used Morningstar CPMS to back-test the strategy from December, 1985, to May, 2016. During this process, 20 stocks were purchased and equally weighted. Stocks would be sold if they fell outside the top 30 percent of the ranked universe, and if the quarterly earnings momentum fell below negative 11. Over this period, the strategy produced an annualized total return of 14.0 per cent, while the S&P TSX composite total return index advanced 8 per cent. Top 20 stocks that qualify today are shown in the accompanying table.

As always, investors are encouraged to conduct their own research before purchasing any of the investments listed here.

Julie Michaels, MBA, is a relationship manager for CPMS at Morningstar Research Inc.

Firms with strong price and earnings momentum

RankCompanySymbolEarnings Variability (%)3M analyst estim. revisions (%)Qtly earnings momentum (%)Qtly Earnings Surprise (%)3M price chg (%)6M price chg (%)9M price chg (%)Value of shares traded last month ($ mil.)Market float ($ mil.)Div. yield (%)
1Dorel Industries IncDII.B-T7.115.8817.1018.8919.2810.7910.3040.29 908.43 4.45
2Ritchie Bros. AuctionsRBA-T8.2614.867.024.0721.4527.8623.57106.29 4,585.33 1.93
3Atco Ltd., IACO.X-T5.804.4014.703.6013.4924.8713.72157.66 3,332.07 2.56
4Quebecor Inc., BQBR.B-T6.817.695.334.296.307.0024.10393.93 3,025.06 0.50
5TMX Group Ltd.X-T3.576.010.270.999.9444.0610.0332.11 1,206.05 3.10
6CAE Inc.CAE-T5.081.087.794.675.132.8711.67195.87 4,251.98 1.90
7Bank of Nova ScotiaBNS-T1.690.860.911.260.8814.408.843333.25 77,010.93 4.50
8TransForce Inc.TFI-T6.549.202.023.535.28-0.42-1.5971.22 1,921.93 2.89
9Cdn REITREF.UN-T3.691.673.092.274.1911.6514.62103.89 3,434.09 3.90
10Royal Bank of CanadaRY-T2.930.742.462.143.184.134.633715.81 114,905.39 4.20
11Saputo Inc.SAP-T2.98-2.226.072.14-9.4113.9628.74287.86 8,149.49 1.43
12TransCanada CorporationTRP-T3.480.581.790.0012.1826.7535.731369.38 40,239.66 3.95
13Cdn Western BankCWB-T2.74-1.521.792.721.284.624.13170.66 2,002.83 3.76
14Metro Inc.MRU-T2.791.163.770.00-2.0213.9621.42399.20 10,448.63 1.27
15Waste Connections IncWCN-T4.744.521.950.007.5415.5938.473301.82 15,804.35 0.83
16Richelieu Hardware Ltd.RCH-T2.390.001.010.0010.6910.3412.4713.74 1,092.19 0.85
17SNC-Lavalin Group Inc.SNC-T8.402.881.115.5710.4327.4337.97386.25 7,852.40 1.98
18Cdn Utilities Ltd., ACU-T5.701.2113.421.011.5715.592.24174.59 4,335.26 3.52
19BCE Inc.BCE-T2.650.000.050.001.1812.039.651616.32 52,039.20 4.56
20Cdn Imperial BankCM-T3.060.331.200.003.309.904.532236.65 39,552.32 4.83

Source: Morningstar Canada