What are we looking for?
Steady stocks showing consistency for turbulent times.
The screen
With uncertainty continuing to loom over Canadian markets, this strategy focuses on liquid stocks that have exhibited characteristics of consistency over the medium-to-long term, by ranking on the following factors:
- Earnings variability (which measures the volatility of historical earnings of each company going back to 1985 – lower scores preferred);
- Spread of current year estimates (which measures the consistency of analysts’ expectations for earnings; a lower spread indicates that analysts have a more consistent view of the stock);
- Five-year earnings-per-share growth;
- 90-day standard deviation of daily total returns (which is, in essence, a measure of price volatility – a lower figure preferred);
- Annual earnings momentum (latest four quarters of reported earnings versus the same figure four quarters ago);
- Annual cash flow momentum (latest four quarters of reported cash flow versus the same figure four quarters ago).
To qualify, stocks must have an average daily trading volume of at least $2-million. To avoid overly leveraged companies, only stocks with debt-to-equity ratio of less than 0.4 and a cash-flow-to-debt ratio of more than 0.2 were considered (these figures represent the median value for stocks in the Canadian CPMS universe).
More about Morningstar
Morningstar Research 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. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.
What we found
I used Morningstar CPMS to backtest this strategy from June, 2002, to January, 2016. The strategy holds 20 stocks, equally weighted, with a maximum of five stocks a sector. Stocks are sold if they fall outside the top 30 per cent of the ranked universe, or if annual earnings momentum drops by more than 10 per cent.
Over this period, the strategy produced an annualized total return of 12.8 per cent while the S&P/TSX composite total return index produced 7.2 per cent. In the trailing 12-month period ended Jan. 31, 2016, the strategy produced 5.1 per cent while the S&P/TSX composite total return fell by 9.9 per cent. Today, 17 stocks qualify and are listed in the accompanying table.
As always, investors are encouraged to conduct their own independent research before acting on any of the investments listed here.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.