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Number Cruncher

Stocks with brightening profit outlooks Add to ...

What are we looking for?

The latest on a strategy we explored in early December. It consists of looking for Canadian companies with improving profitability and rising expectations.

More about today’s screen

Craig McGee, senior consultant at CPMS Morningstar Canada, created the stock screen, which appeared Dec. 6.

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The concept was to look for growth companies with a brightening profit outlook. Mr. McGee ranked more than 700 Canadian firms according to multiple criteria, and selected the top 20 stocks with a market cap greater than $500-million. To guard against too much focus on any single industry, he allowed no more than five stocks from any one sector.

The criteria he examined were:

-Four-year average return on equity (ROE);

-Three-month consensus 2012 EPS estimate revisions;

-Annual rate of change of ROE (latest reported 12-month ROE versus ROE from four quarters before);

-Annual rate of change in earnings per share (latest reported 12-month EPS versus EPS from four quarters before);

-Annual rate of change of revenue (latest reported 12-month revenue versus revenue from four quarters before);

-Annual rate of change of operating cash flow (latest reported 12-month CF versus CF from four quarters before);

-Change in net margin (latest reported 12-month EPS/sales minus EPS/sales from four quarters before).

The grades in the accompanying table show how each stock ranks on these criteria versus the other Canadian stocks in the CPMS universe. A is best, E is worst.

More about CPMS

A division of Morningstar Canada, CPMS provides quantitative North American equity research and portfolio analysis to institutional clients as well as financial advisers through software and Web-based tools. CPMS covers more than 700 Canadian and 2,200 U.S. stocks, and spends a great deal 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?

The strategy performed well, nearly doubling the market’s return over the past three months. If an investor had constructed a portfolio consisting of equal amounts of each of the stocks on Dec. 2, when Mr. McGee ran the numbers, and sold them on March 2, the total return would have been 8.53 per cent. The S&P/TSX composite total return index produced a 4.34-per-cent payoff over the same period.

Today’s chart shows how each of the stocks looks now. Note that many would no longer win a nod from this strategy as revisions to their earnings estimates have turned negative.

 

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