Value stocks for the conservative investor

What are we looking for?

Value stocks with strong earnings momentum. Last week we did a similar screen that produced a small-cap portfolio that required frequent trading. This time we want to adapt the strategy for more conservative investors.

More about today's screen

We'll enlist the help of CPMS, as we do each week on Tuesdays. Last week, we looked at CPMS's Earnings Value Model, which rates stocks by low trailing price-to-earnings ratios. The model also looks for stocks with past earnings growth, forward earnings estimates that are rising and positive earnings surprises.

Each category is rated A to E, with A being the most desirable for investors. CPMS updates a list of the top 30 stocks for the portfolio every day. While the portfolio has significantly beat the market over the short and long term, it is a risky strategy because the names in the portfolio turn over more than 100 per cent each year and the model produces mostly small caps.

To adapt the strategy for the more conservative investor, Jamie Hynes suggests limiting the screen to names in the S&P/TSX 60 index and capping sector concentration at 10 stocks per sector. To prevent excess turnover, the CPMS senior consultant also suggests that names are not replaced until they fall below the overall rank of 45 out of 60 stocks. Only the top 20 stocks in the portfolio of 30 names are listed here.

More about CPMS

CPMS is a Toronto-based equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 670 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?

Predictably, this more conservative portfolio didn't do as well as the more aggressive one, but it still beat the S&P/TSX benchmark. It scored a one-year total return of 20.2 per cent as of the end of November, versus 16.3 per cent for the S&P/TSX total return index. Over 10 years, it produced a return of 13.5 per cent, versus 6.3 per cent for the total return index.

"This model is an example of winning by not losing," Mr. Hynes said. "It wins by staying out of the worst 15 stocks in the TSX 60, that is, the most expensive stocks with the worst short-term earnings."

Full disclosure: I own shares of Power Corp. of Canada.

Stocks in this column include:

Sun Life Financial Inc. , Magna Intl. Inc. , Research In Motion Ltd. , Cdn. Tire Corp. Ltd. , BCE Inc. , Inmet Mining Corp. , Cdn. Oil Sands Trust , First Quantum Minerals , Barrick Gold Corp. , National Bank of Canada , Yellow Media Inc. , Telus Corp. , CIBC , Metro Inc. , Loblaw Companies Ltd. , Bank of Montreal , Cdn. National Railway , Power Corp. of Canada , ,