What are we looking for?
Companies trading in Canada showing predictable growth.
The screen
As we enter into the fourth-quarter earnings season, growth-oriented investors who are nervous about the continued volatility in equities may look here for some ideas. Year-to-date, the CPMS Canadian Predictable Growth strategy remains one of our best performing equity strategies and is designed for conservative investors seeking growth at a reasonable price. The strategy looks for stocks with good earnings value, whose book values are growing but whose earnings have low levels of variability. Secondary importance is placed on low price-to-book ratios along with earnings surprise and quarterly earnings momentum. More specifically, the strategy ranks stocks on the following metrics:
- earnings variability (a lower earnings variability is preferred);
- forward reinvestment rate (this shows the percentage of a company’s earnings that are reinvested for future growth);
- forward price-to-earnings ratio;
- quarterly earnings momentum (latest four quarters of reported earnings compared against the same figure one quarter ago);
- quarterly earnings surprise (the Street’s consensus estimate versus what the company actually reported);
- price-to-book ratio;
- price change over three and six months.
Only stocks that have at least $12-million in monthly trading volume and that are followed by at least three analysts are considered.
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
CPMS has tracked the performance of the strategy from December, 1985, to September, 2015. The strategy uses a 30-stock portfolio that is equally weighted. Stocks are sold if their rank drops below the top 200 names in the universe, or if the quarterly earnings momentum falls by more than 5 per cent. Over this period, the strategy produced an annualized total return of 14 per cent while the S&P/TSX total return index gained 8 per cent. The top 30 stocks that qualify today are listed in the table.
As always, investors are advised to conduct their own independent research before purchasing stocks shown.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.