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WHAT ARE WE LOOKING FOR?
Strip away all the other noise in the stock market, and growth is at the root of the value of any stock. All other things being equal, the more a company's profits grow, the more its stock will grow.
Yet identifying fast-growing companies can be a trap; growth spurts aren't always sustainable over the long term, and some volatile, cyclical companies can post big profit surges one quarter that evaporate the next.
On the other hand, stocks that have been steady, reliable growers have proven themselves to have superior stock performance over the longer term.
Today, we search for such stocks.
CPMS PREDICTABLE GROWTH
CPMS Computerized Portfolio Management Services Inc., an independent provider of investment data, maintains a Predictable Growth model portfolio that aims to identify stocks exhibiting highly predictable growth.
The model portfolio screens for stocks over seven key indicators that point to reliable, consistent growth performance:
-low price-to-earnings;
-high reinvestment rate;
-low earnings variability (i.e. a lack of wild swings in quarterly profits);
-low price-to-book-value;
-high earnings growth over the past four quarters;
-upward revisions in earnings estimates over the past three months;
-and positive surprises in quarterly earnings compared with consensus expectations.
(CPMS doesn't weight all these factors equally, but for proprietary reasons, it doesn't disclose its weightings.)
The CPMS Predictable Growth model portfolio has proven itself over time: The model has generated annualized returns of 16.6 per cent since 1985, compared with 9.9 per cent for the S&P/TSX composite total-return benchmark.
Using the same methodology used to develop the model portfolio, CPMS has generated a list of the TSX stocks that currently score highest under this screen. We'll refer to it as the Predictable Growth Buys list.
WHAT DID WE FIND?
CPMS's Predictable Growth Buys screen shows an average return of 14 per cent for the top 25 stocks for the year to date. That handily beats the S&P/TSX composite index, where year-to-date total returns are 9.4 per cent.
WHAT'S NEXT?
Tomorrow, we'll discuss the stocks that currently rank lowest using CPMS's screen – the Unpredictable Growth model.
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Table: View result set 
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