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NUMBER CRUNCHER

A portfolio strategy that beat the S&P 500 Add to ...

Craig McGee of Morningstar Canada ranks the top 20 stocks according to five key metrics

What we’re looking for

U.S. stocks with the metrics that led to the best performance in 2013.

The screen

Our friend Craig McGee, senior consultant at Morningstar Canada, analyzed a selection of the most commonly used metrics for stock performance over the year. At the start of each quarter, the best and worst 50 S&P 500 stocks were equally weighted using each metric separately, and he measured the performance of the portfolios. For example, one portfolio would have held the 50 stocks with the lowest P/E ratios and another portfolio would hold 50 stocks with the highest P/E ratios.

He ranked the S&P 500 for the 20 best-ranking stocks today with the best combination of the following top performing metrics:

  • Price to sales (trailing four quarters)
  • Price to earnings (trailing four quarters)
  • Five-year growth rate of operating earnings
  • Price change over the past nine months
  • Latest quarterly earnings surprise.

Mr. McGee then backtested the strategy over the past 20 years, beginning Dec. 31, 1993, using Morningstar’s CPMS database. At inception, a similar 20-stock portfolio was selected and each month the universe was reranked so stocks that fell outside of the top 200 would be sold and replaced.

More about Morningstar

Morningstar 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.

What we found

The 2013 total return for this strategy was 50.8 per cent, while the S&P 500 posted a total return of 32.3 per cent. The strategy’s five-year, 10-year and 20-year annualized returns were 28.6 per cent, 15.7 per cent and 14.8 per cent, respectively. The S&P 500’s five-year, 10-year and 20-year annualized returns were 17.9 per cent, 7.4 per cent and 9.2 per cent, respectively. Performance has been pretty volatile, however, and the maximum drawdown experienced was negative 58.0 per cent from the end of May, 2008, to the end of February, 2009.

CPMS U.S. Top 20 Portfolio

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