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Number Cruncher

Underwhelming stocks with outsized potential Add to ...

What are we looking for?

Stocks that have low expectations but can deliver some pleasant surprises.

More about today's screen

We'll ask for help from Morningstar CPMS again today. CPMS can help us find stocks with low current-year earnings-growth expectations, as well as those with rising earnings expectations for the current year.

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Often stocks with high growth expectations are priced for perfection. If the stocks ever miss those high expectations they are punished severely because valuations are so high.

This screen should help us find stocks that are reasonably priced with the possibility of rising favour in the market.

More about CPMS

CPMS is a Toronto-based equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 680 of the largest and more liquid Canadian stocks, plus another 2,100 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company's quarterly results to make sure screens can perform correctly.

What did we find out?

Jamie Hynes, senior consultant at CPMS, ran this screen through his company's back test system, or historical results testing, and found it works quite well. Their system freezes data at the end of every month to eliminate issues such as survivorship-bias (some historical screens omit companies that no longer exist, which can result in an overestimation of past returns).

He used a minimum market capitalization of $200-million for Canadian stocks only. The screen looked for stocks with low - but rising - growth expectations, but he included other valuation information to show that many of these stocks are cheap (grading of "A" is expensive, "E" is cheap).

CPMS's back test system uses monthly data back to Dec. 31, 1985. The strategy returned 16.4 per cent since inception, versus 9.2 per cent for the S&P/TSX total return index benchmark. Over the last year, it has returned 37.4 per cent, versus 24.8 per cent for the benchmark.

"People look at the growth expectations and think these stocks look terrible," Mr. Hynes said, "but if they keep beating expectations we know [this strategy]works over time."

Stocks in this column include:

Canfor Pulp Products , Canfor Corp. , West Fraser Timber Co. , Breakwater Resources , AltaGas Ltd. , GMP Capital Inc. , Canaccord Financial , Enerplus Corp. , Keyera Corp. , Advantage Oil & Gas Ltd. , Capital Power Corp. , Guyana Goldfields Inc. , Canadian Oil Sands Ltd. , Provident Energy Ltd. , Labrador Iron Stp Unit , Cogeco Cable Inc. , Open Text Corp. , Imperial Oil Ltd. , Ivanhoe Energy Inc. , Veresen Inc.

Follow on Twitter: @ScottAdams_Edit

 
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  • CFP-T
  • WFT-T
  • BWR-T
  • ALA-T
  • GMP-T
  • CF-T
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  • KEY-T
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  • GUY-T
  • COS-T
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