What are we looking for?
Industry leaders among mid-sized to large-cap Canadian companies. We wanted to spotlight firms that have demonstrated an ability to grow but are still trading at reasonable valuations compared with others in their industries.
More on today’s screen
Craig McGee, senior consultant at CPMS, a division of Morningstar Canada, constructed the screen, which is based on the CPMS Canadian Industry Relative strategy.
The strategy ranks stocks on both growth and value criteria in comparison with each stock’s industry group. Earnings momentum, estimate revisions and earnings surprises are also emphasized.
The strategy posted annualized returns of 9.2 per cent over the five years to the end of 2011, and 18 per cent over 10 years. The S&P/TSX composite index came in at 1.3 per cent and 7 per cent over the same periods, respectively.
The strategy is off to a good start so far this year. It is up 6.4 per cent to Jan. 19, while the S&P/TSX composite total return index has advanced 3.6 per cent.
The strategy does not include any constraints on how many stocks can come from any one sector and so it can be significantly overweight in some industries. For today’s screen, Mr. McGee added another level of diversification by allowing no more than three stocks from each industry group.
More about CPMS
CPMS provides quantitative North American equity research and portfolio analysis to primarily institutional clients. It covers more than 700 Canadian and 2,200 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?
A well diversified list of companies that look cheap in comparison to their sectors. Some of these stocks, such as drug maker Valeant, have enjoyed strong rises in recent months. Others, such as financial conglomerate Power Corp., are more notable for their large dividends.
Of course, investors should always do their own research before buying.
Full disclosure: I own shares in Fairfax and Atco.