What are we looking for?
We'll continue the portfolio exercise we started last week in a bid to combine the best Canadian dividend stocks with the best growth stocks, which we'll further define as the best asset growth stocks.
This week we'll look at asset growth stocks and then next Tuesday we'll combine the two portfolios into one.
More about today's screen
We'll get help from Morningstar CPMS for this screen. The screen looks for:
- A high reinvestment rate on both an historical and estimated future basis, as defined by earnings per share minus dividends per share divided by book value;
- Rising forward earnings estimates during the last three months;
- Positive earning surprises in the last quarter;
- Sales growth in the last four quarters versus the previous four quarters.
More about CPMS
CPMS is an equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 680 of the largest and more liquid Canadian stocks, plus another 2,100 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 out?
Jamie Hynes, a CPMS senior consultant, created a portfolio based on this screen going back to 1985. Stocks were sold from the portfolio when they fell below the 40th percentile of the largest 250 Canadian stocks that CPMS follows. He included price to earnings and price to book value per share ratios in the table only for reference, as these ratios were not a factor in the screen.
Since inception, the portfolio has a 17.2 per cent annualized return, versus 9 per cent for the S&P/TSX composite total return index. Over the past year, the portfolio has returned 24.7 per cent, versus 20.4 per cent for the benchmark.
Mr. Hynes notes that this portfolio does very well when the markets are rising, as it rose in 17 of 18 years when the TSX rose.
"On the downside, turnover and volatility are relatively high," Mr. Hynes said. "It can also struggle in a down market." In 2008, the model fell 45.2 per cent versus a 33-per-cent decline in the S&P/TSX composite total return index.
In contrast to the Dividend Growth model we looked at last week, the Asset Growth model looks for highly profitable companies that are reinvesting earnings and growing book value. Emphasis is also placed on short-term earnings to ensure re-invested profits are being deployed effectively.
More-conservative investors would be wise to also look at valuations as this is an aggressive strategy that ignores price multiples.
Scott Adams