What are we looking for?
A balanced strategy that straddles both growth and value investing.
Value investors like companies that are cheap in terms of their earnings or assets; growth investors prefer businesses that can rapidly expand their revenues and profits.
Both strategies can work, but both go through fallow periods when they disappoint. Combining both value and growth approaches may produce more consistent returns than following either one alone.
How we did it
Craig McGee, senior consultant at CPMS Morningstar Canada, took us on a tour of a CPMS model portfolio that is half value, half growth.
The CPMS Canadian Double 10 Value and Earnings Momentum Strategy pools 10 stocks selected by the CPMS Canadian Value strategy and 10 stocks selected by the CPMS Canadian Momentum strategy.
The value stocks have low price-to-earnings and price-to-cash-flow multiples – classic indicators of value. The momentum stocks have earnings momentum (in other words, rapidly rising profits); they're also stocks for which analysts are bumping up their earnings estimates.
The pooled strategy limits its exposure to any single industry. In the value half, no more than two stocks can come from any one industry. In the momentum half, no more than three stocks can come from a single sector.
The table shows the current components of the portfolio, listed alphabetically.
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.
What we found
The pooled strategy has posted a total return, year to date, of 34.5 per cent while the S&P/TSX composite total return index is up 11 per cent. Since Dec. 31, 1985, the model's annualized return is 18.6 per cent, versus 8.3 per cent for the index.
Remember, though: Past success doesn't guarantee future gains. Do your own research before buying any of the stocks listed here.
Ian McGugan