What are we looking for?
The best U.S. large-cap growth stocks.
More about today's screen
We'll turn to Morningstar CPMS for help today on this. CPMS created a screen that looks for S&P 500 stocks with:
- A re-investment rate higher than the median of S&P 500 constituents (current median is 13 per cent). Re-investment rate is defined as the return on equity after payment of dividends or (earnings per share - dividends per share)/book value.
- Positive earnings growth (trailing four quarters versus previous four quarters).
- Positive earnings surprises or in other words, has beat earnings expectations last quarter.
CPMS then ranked stocks based on the best combination of:
- Re-investment rate.
- The ratio of estimates that have been raises versus estimates that have been cut as a percentage of the total number of forward estimates.
- Earnings growth.
- Earnings surprises.
- Price change over the last three and six months
What did we find out?
Jamie Hynes, senior consultant with CPMS, ran a test of this screen back to 1993 and found it has returned 14 per cent annually, versus 8.4 per cent for the S&P 500 total return index.
It has been especially productive the past 10 years, returning 8.1 per cent annually, versus 2.8 per cent for the benchmark.
"[This is a great example of]how a disciplined approach to portfolio management works as long as the strategy makes fundamental sense," Mr. Hynes said.
In years when the market is rising, this portfolio beat the benchmark in 10 of 13 years. However, in years when the market is falling, it beat the benchmark in only one of four years.
The downsides to this portfolio are that it is fairly volatile compared to the benchmark and turnover is quite high as well, with approximately 20 buys and sells per year.
The columns on price-to-earnings ratios and book value are not factored into the screen, but have been added to the table for reference only.
Scott Adams