What are we looking for?
Momentum names with a history of consistent reported earnings.
The screen
What a rally it's been! Year to date, the S&P/TSX total return index is up 13.6 per cent, with Canada's abundant materials and energy sectors leading the charge. This being said, many investors are likely questioning the conviction in the most recent rally as much of this has to do with the recent fluctuation in crude and gold prices. With this in mind, this week I create a strategy that balances several momentum factors with a factor for consistency of reported earnings. The strategy ranks stocks on:
- Earnings variability (a measure of earnings consistency; companies exhibiting consistent earnings will have a lower number, and are preferred);
- Three-month estimate revisions (today’s consensus estimate versus what it was three months ago);
- Quarterly earnings momentum (latest four quarters of reported earnings versus the same figure one quarter ago);
- Latest quarterly earnings surprise (latest reported earnings versus the consensus estimate just prior to the company’s report);
- Twelve- and nine-month price change.
To qualify, stocks must have at least $1.6-million in average volume traded and must have at least three active analysts covering the stock. Real estate investment trusts and unit trusts were excluded from this strategy.
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, 1991, to June, 2016. 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 30 per cent of the ranked universe, or if the consensus earnings-per-share estimate turned negative. Over this period, the strategy produced an annualized total return of 15.2 per cent while the S&P/TSX total return index produced 8.4 per cent. The 20 stocks that qualify today are listed in the accompanying table.
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.