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Number Cruncher

Highly predictable stocks in an unpredictable world Add to ...

What are we looking for?

Predictability.

As economic storm clouds gather, we’re searching for places to hide in the Canadian stock market – companies with low volatility and highly predictable earnings.

More about today’s screen

Craig McGee, senior consultant at CPMS Morningstar Canada, created today’s offering.

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He filtered the CPMS database of Canadian companies for large firms that stand out for the relative smoothness of their recent performance. He looked for firms with:

-a market cap greater than $500-million;

-three-year earnings volatility that is less than the median of CPMS’s Canadian stock universe; -three-year stock price beta that is less than the median of the Canadian stock universe. Beta is a measure of how much a stock’s price moves relative to the movement of the overall market; the lower the beta, the more stable the stock;

-balance-sheet financial leverage (defined as total assets divided by shareholders equity) that is less than the median for the Canadian stock universe.

The results are sorted by total return year-to-date.

More about CPMS

CPMS, a division of Morningstar Canada, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers through software and Web-based tools.

It covers more than 700 Canadian and 2,200 U.S. stocks, and adjusts for unusual accounting items in each company’s quarterly results to make sure screens can perform correctly.

What did we find?

Evidence that predictability may not be the same as safety.

Some of the stocks on our list fit the traditional notions of a low risk, predictable stock. Bell Aliant, for instance, is a classic phone utility, while Shoppers Drug Mart is a retailer of consumer staples.

Other entries, though, look decidedly racier. Lululemon, the retailer of yoga wear, has been red hot, but some investors question whether the market for designer exercise wear can expand indefinitely. Kinross Gold is exposed to the vagaries of gold prices as well as specific issues in its African production. And Rona faces fierce competition in the hardware business. All of which suggests that safety-seeking investors should think twice before assuming that predictability can be forecast.

Follow on Twitter: @IanMcGugan

 
  • BA-T
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