Craig McGee is a senior consultant at Morningstar Canada.
What are we looking for?
A portfolio of profitable Canadian stocks that may still be available at reasonable valuations.
Specifically, I searched the CPMS Canadian equity database for the 20 stocks with the best combination of the following metrics:
– Trailing earnings yield (operating earnings over the latest four quarters divided by the latest price)
– Trailing return on equity
– Price relative to the average price over the past year (higher is better)
– Total asset turnover (sales over the latest four quarters divided by total assets)
– Revision of the consensus EPS estimate over the past three months
– Earnings and price stability
Stocks were selected out of the top half of the CPMS universe based on market capitalization and average monthly volume.
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. 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
Using CPMS, I backtested the strategy to apply the same rules-based approach since December 31, 1991. A portfolio of 20 stocks was equally weighted and would be held until they fell outside of the top 40 per cent, at which point they would be replaced with the next top-ranking stock available.
Over the 12 months ended June 30, 2014, this strategy was able to more than keep up with the market, generating a total return of 29.6 per cent compared with 28.7 per cent for the S&P/TSX Composite Total Return Index. For the full period stretching back to 1991, following this strategy with a strict discipline would have generated an annualized total return of 18.8 per cent while the index came in at 9.2 per cent.
Profitable Canadian stocks with reasonable valuations
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