What are we looking for?
A core, diversified U.S. portfolio representing most economic sectors.
The screen
A few weeks ago, I wrote about a strategy that picks one company from each major economic sector in Canada to complete a well diversified portfolio of around 10 companies. This week, I do the same for the U.S. market by ranking stocks based on the best combination of the following characteristics:
Market cap (here larger names are preferred);
- Dividend yield;
- Variability of earnings over the trailing five-year period (lower figures preferred, implying companies are reporting consistently);
- Quarterly earnings momentum (the latest four quarters of reported earnings compared against the same figure one quarter ago);
- Latest reported return on equity (a profitability measure);
- Price to book multiple (a value-based ratio).
To qualify, stocks must be ranked in the top 10 per cent of our universe (which today consists of 2,180 U.S.-listed companies).
More about Morningstar
Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.
What we found
I used CPMS to back-test the strategy from December, 1993, to September, 2016. During this process, a maximum of 11 stocks were purchased and equally weighted with a maximum of one stock per sector. Stocks would be sold if they fell outside the top 25 per cent of the ranked universe, or if three-month estimate revisions dropped by more than 15 per cent.
Over this period, the strategy produced an annualized total return of 12.5 per cent while the S&P 500 total return index advanced 9.1 per cent. The top 10 stocks that qualify for purchase today are listed in the accompanying table. Note that real estate isn't covered in the qualifying list because no stocks in real estate are within our top 10 percentile of ranked companies.
As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.