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Blue Stock Chart Growth (Getty Images/iStockphoto)

Number Cruncher

In pursuit of undervalued companies with predictable earnings Add to ...

What are we looking for?

Undervalued companies with large margins of safety.

While there are no sure things in the stock market, some firms are more predictable than others – think about the difference between, say, McDonald’s and a social media startup.

With the help of Craig McGee, senior consultant at Morningstar Canada, we set out to find bargain-priced stocks with high levels of predictability around their future earnings.

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Think of these stocks as cheap, nearly sure things.

How we did it

Mr. McGee, senior consultant at Morningstar Canada, delved into the Morningstar CPMS database to find U.S. stocks with low “uncertainty” ratings.

Morningstar analysts calculate this proprietary rating by considering factors such as a company’s sales predictability, operating leverage and financial leverage.

The analysts classify stocks into several uncertainty levels: low, medium, high, very high or extreme.

Once Mr. McGee identified low uncertainty stocks, he searched for the ones that were trading at the biggest discounts to Morningstar’s calculation of their fair value.

The top 15 are shown in the accompanying table.

More about Morningstar

Morningstar Inc. provides independent investment research in North America, Europe, Australia and Asia.

Its investment 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

Uncertainty is an important factor for investors to consider. The more predictable a stock is, the lower the margin of safety that is required to make it a tempting investment.

The stocks on our list tend to have steady, recurring revenues. McDonald’s, Johnson & Johnson and Costco all benefit, for instance, from selling products that people will continue to buy even in a recession. By Morningstar’s calculations, they all trade well below their fair values, giving investors a substantial margin of safety.

Remember, though, that there are no sure things – despite their attractive characteristics, the stocks listed here could still fall, especially in the short term. Before buying any of them, do your own research.

Follow on Twitter: @IanMcGugan

 

U.S. stocks with low 'uncertainty' ratings

Company Symbol Market Cap ($ mil) $ Price (Nov 9)
Buckeye Partners L P BPL-N 4,444 45.38
Costco Wholesale Corp COST-Q 41,279 95.46
TC Pipelines LP TCP-N 2,238 41.85
Becton, Dickinson & Co BDX-N 15,013 75.23
Chevron Corporation CVX-N 207,148 105.84
Spectra Energy Corp. SE-N 17,915 27.44
Royal Dutch Shell Plc RDS.A-N 215,925 68.00
American Electric Power AEP-N 20,283 41.80
Novartis AG NVS-N 145,799 60.30
Great Plains Energy Inc GXP-N 3,116 20.31

All dollar figures U.S. Source: Morningstar Canada

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