What are we looking for?
One of the most popular predictors of stocks that can beat the market is consistent sales growth. Let’s look for companies in the S&P 500 that have grown their sales every year for the past 15 years.
More about today’s screen
This is similar to last week’s screen ( tgam.ca/CfT3) for Canadian stocks with consistent sales growth.
Morningstar CPMS filtered the S&P 500 for names that have posted sales growth every year since 1995 and came up with 24 names. All of them have a price return (not including dividends) that has outperformed the S&P 500 on an annualized basis over that period.
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 more than 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?
Stocks with consistent sales growth can trounce the market. These 24 stocks had a median price return of 12.4 per cent, versus 5 per cent for the S&P 500.
Craig McGee, a senior consultant with CPMS, ran a further test that selected the best 50 stocks in the S&P 500 every year since the end of 1995 based on five-year annualized sales growth.
That portfolio returned 10.2 per cent including dividends this time, versus 7 per cent for the S&P 500 total return index. That compares to a 9.8-per-cent total return for the 50 worst stocks for sales growth.
Last week, the worst Canadian stocks for sales growth outperformed the best Canadians stocks for sales growth, indicating that stocks with aggressive growth had trouble living up to expectations. Its different in the U.S., where the aggressive sales growth stocks appear to hold up better.
But Mr. McGee did a further test and looked at stocks beyond the S&P 500 with daily trading volumes of a minimum $2-million in share value. The top 50 stocks for sales growth beyond the S&P 500 returned 15.8 per cent annualized, versus 3.4 per cent for the bottom 50 not in the S&P 500.
“Companies within the S&P 500 attract the most attention making it more difficult to take advantage of anomalies,” Mr. McGee said. “As you move away from the largest companies the market responds to news and reports less efficiently and diligent investors may be able to uncover opportunities.”