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Twenty-stock portfolio mixes stability and momentum

Craig McGee is a senior consultant at Morningstar Canada.

What are we looking for?

A conservative portfolio of stocks making efficient use of their assets that also have reasonable momentum.

Specifically, I scanned the CPMS Canadian equity database for the 20 stocks with the best combination of the following metrics:

- High asset turnover (the ratio of sales to total assets);

- High stock price stability over the past year;

- High earnings stability over the past five years;

- Low enterprise value-to-sales ratio, and;

- High total return over the past year.

Stocks were screened out if they fell in the bottom quarter of the database based on market cap or average trading volume to avoid the most illiquid names.

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

Using CPMS, I back-tested the strategy to apply the same rules-based approach beginning Nov. 30, 2001. A portfolio of up to 20 stocks was equally weighted and stocks would then be reselected using the same process every three months.

Over the past three-year period, the strategy generated an annualized total return of 21.6 per cent versus 5.0 per cent for the S&P/TSX composite total return index.

For the full period back to 2001, this approach would have posted an annualized return of 17.0 per cent, while the index came in at 8.2 per cent.

Canadian conservative growers

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