What are we looking for?
Conservative consumer defensive and cyclical stocks with a dividend focus.
The screen
Will Donald Trump and the Republican party make the necessary policy changes to increase consumer spending? The answer will come in time, but hopeful investors may look to this week's strategy, which focuses on the consumer defensive and consumer cyclicals with a conservative income focus. The strategy ranks stocks on the best combination of:
- Market capitalization (larger companies are preferred here);
- Three-month estimate revision (today’s consensus estimate versus what it was three months ago);
- Industry relative dividend yield (as an example, figure of 3.3 per cent indicates that the stock is yielding 3.3 per cent higher than the median stock in the same sector);
- Forward return on equity;
- Return on total assets.
To qualify, stocks must have a market capitalization of $3-billion (U.S.) or above.
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, 1993, to October, 2016. During this process, a maximum of 20 stocks were purchased and equally weighted. Stocks would be sold if they fell outside the top 25 per cent of the ranked universe.
Over this period, the strategy produced an annualized total return of 11.9 per cent while the S&P 500 total return index advanced 9 per cent. In 2008, the strategy lost 10.5 per cent while the S&P 500 index fell 37 per cent.
The top 20 stocks that qualify for purchase today are listed in the table below.
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.