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Number Cruncher

High returns - and risks - with this portfolio Add to ...

What are we looking for?

Value stocks with strong earnings momentum.

More about today's screen

We'll enlist the help of CPMS today, as we do each week on Tuesdays. It's Earnings Value Model rates stocks by low-trailing price-to-earnings ratios. A is desired for investors (low valuation) and E is undesired (high valuation).

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The model then looks for stocks with past earnings growth, forward earnings estimates that are rising and positive earnings surprises.

Again, each category is rated A to E, with A being the most desirable for investors.

CPMS updates this list of the top 30 stocks for the portfolio every day. There is no cap on the limit of stocks in each sector. Only the top 20 stocks currently in the portfolio are listed with the column.

More about CPMS

CPMS is a Toronto-based equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 670 of the largest and more liquid Canadian stocks, plus another 2,100 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company's quarterly results to make sure screens can perform correctly.

What did we find out?

The results for this portfolio are very strong. It has returned 22.6 per cent for the past 10 years, versus 6.3 per cent for the S&P/TSX total-return index. Over the past year, it is up 18.4 per cent, versus 16.3 per cent for the total-return index.

The downside of this portfolio is the turnover. The annual turnover is 105 per cent, meaning the names in the portfolio completely change every year. This can be costly for trading fees and can be difficult for investors to keep on top of. This portfolio is also skewed toward higher-risk, small-cap names and could be riskier because it could get concentrated in a few sectors.

Next week, we'll look at a version of this strategy that still produces strong returns, but is easier to manage and may appeal to more conservative investors.

 

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