What are we looking for?
Let's test to see how important revenue growth is when selecting stocks.
More about today's screen
Jamie Hynes, senior consultant with Morningstar CPMS, ran through all the Canadian stocks his firm follows, excluding some of the smaller illiquid names, and came up with 17 companies that have grown their sales every year for the past eight years.
More about CPMS
CPMS is an 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?
Some 12 of the 17 stocks captured in the screen have beaten the annualized return of the S&P/TSX composite index over eight years. In fact, the median annualized return of these 17 stocks is 18 per cent, versus 8.7 per cent for the index.
Consistent sales growth is obviously attractive for long-term returns. But what about aggressive sales growth? Investors are much more likely to be attracted to companies that are growing much faster than the market.
Mr. Hynes tested a different strategy in which he created a portfolio that bought the top 50 sales growth stocks annually over the past five years. What he found out is startling, as he found that the aggressive sales growth strategy created an annual return of just 9.9 per cent, which is much lower than a strategy of buying the 50 worst stocks for sales growth every year (11.8 per cent total return).
"Stocks with the highest level of sales growth inevitably disappoint investors going forward where those with the worst sales growth track-record have extremely low expectations that are more likely to be exceeded," Mr. Hynes said.