What are we looking for?
Canadian stocks with higher growth rates as a result of reinvestment of earnings.
Specifically, I looked at the 20 stocks currently held in the CPMS Canadian Asset Growth model portfolio. The strategy emphasizes stocks with the best combination of the following metrics:
– Forward and trailing reinvestment rates (earnings less dividend payouts as a percentage of the latest reported book value);
– Consensus earnings estimate revisions over the past three months;
– Latest quarterly earnings surprise;
– Quarterly sales momentum (or QSM, which equals the percentage change between the latest four quarters' sales and four quarters' sales from the previous quarter).
Stocks are selected from a subset of the 250 largest equities in the CPMS Canadian database. (Note that Air Canada has negative shareholders' equity so CPMS uses a default minimum of 1 cent a share to calculate its reinvestment rate.)
The model is reviewed daily and stocks are replaced if they fall outside of the top 40 per cent of the subset universe, if earnings revisions fall by more than 10 per cent or if the latest earnings surprise is worse than minus 2 per cent.
More about Morningstar
Morningstar 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
Since inception on Dec. 31, 1985, the strategy has produced an annualized total return of 16.4 per cent while the S&P/TSX total return index posted a return of 8.5 per cent.
Over the past 12 months, this model portfolio generated a return of 19.4 per cent while the index came in at 13.3 per cent.
Craig McGee is a senior institutional account manager of global equity and market data sales at Morningstar Research Inc.