What are we looking for?
Companies that are widely favoured by institutional analysts.
The screen
With the third-quarter earnings season essentially completed, institutional analysts have factored in the latest company information and have updated their pricing models and recommendations. This week, I take a snapshot of companies for which analysts have a positive forward-looking view. To reduce the effect of any analyst biases, I've also factored in historical growth rates of earnings to accommodate a backwards looking view. The strategy I created ranks stocks on the best combination of the following factors:
- Number of analysts that have revised their earnings per share estimates upwards versus downwards over the last 90 days;
- Expected growth rate of earnings (analysts’ current year median EPS estimate versus the previous year’s median estimate);
- Three month EPS estimate revisions;
- Annual earnings momentum (trailing four quarters of earnings compared against the same number four quarters ago);
- Historical five-year EPS growth rate;
- Qualifying companies have at least seven analysts actively covering the stock.
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 January, 2002, to July, 2015. During this process, 20 stocks were purchased and equally weighted with a maximum of five stocks per sector. Stocks would be sold if they fell outside the top 50 per cent of the ranked universe. Over this period, the strategy produced an annualized total return of 13.9 per cent while the S&P/TSX total return index produced 7.5 per cent. The top 20 qualifying stocks are listed in the table.
As always, investors are advised to conduct their own independent research before purchasing shares in the companies shown.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.