What are we looking for?
Last week we looked at Canadian companies and U.S. cyclical stocks that scored highest on RBC Dominion Securities' quality rankings. Today, in the final instalment of our three-part series, we'll turn our attention to U.S. non-cyclical stocks. These are companies that are insulated to some extent from the ups and downs of the economy.
The search is timely because investors are starting to rotate into higher-quality names, RBC's analysis shows, whereas the rally that began last March was led by lower-quality stocks.
The screens
RBC employs a three-stage process when looking for high-quality stocks.
The first screen is a 22-step ranking system that delves into four broad categories: growth, value, earnings predictability and momentum. To make the initial cut, a stock has to score in the highest decile - that is, the top 10 per cent - on this screen.
Next, the stock has to score in the top two deciles on RBC's "momentum model," which screens for companies with positive estimate revisions, positive earnings surprises, and growth in earnings and revenue.
Finally, the stock has to rank in the top four deciles based on the predictability of its earnings. The idea here is to exclude companies whose earnings are especially volatile because of writedowns or economic swings.
What did we turn up?
Readers will recognize many names on the list, such as Colgate-Palmolive, Kimberly-Clark and Kellogg. These are well-known, consumer-oriented companies which have been increasing their dividends for years, and which have continued to raise their dividends during the recession. Many well-known U.S. health-related companies, such as Johnson & Johnson and Abbott Labs, also made the list.
John Heinzl