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Number Cruncher Best-in-class: A 20-stock portfolio of industry outperformers

Craig McGee is a senior consultant at Morningstar Canada.

What are we looking for?

Canadian stocks with better-than-industry value and growth characteristics.

The screen

This week, I turn to the CPMS Canadian Industry Relative model portfolio. The strategy ranks and screens on both profitability and value criteria that are measured against each stock's industry group.

Earnings momentum, estimate revisions and earnings surprises are also emphasized. The actual model tracks the performance of up to 40 stocks but we'll narrow our results to the top 20.

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

– Industry-relative forward price to earnings;

– Industry-relative price to book;

– Industry-relative reinvestment rate (operating earnings less dividends as a percentage of shareholders' equity);

– Industry-relative quarterly earnings momentum (QEM – the rate of change of earnings over the past four quarters versus one quarter ago);

– Industry-relative revision of the consensus EPS estimate over the past three months;

– Industry-relative earnings surprise and price momentum.

Stocks were selected out of the top half of the CPMS universe based on market cap and average monthly volume. As another tweak to the live model: No more than five stocks were allowed per industry group.

Using CPMS, I backtested the strategy to apply the same rules-based approach since Dec. 31, 1985. A portfolio of 20 stocks was equally weighted and would be held until they fell outside of the top 200 ranking, at which point they would be replaced with the next top-ranking stock available.

Over the 12 months ended July 31, 2014, this strategy generated a total return of 38.9 per cent versus 26.5 per cent for the S&P/TSX Composite Total Return Index. For the full period stretching back to 1985, following this strategy with a strict discipline would have generated an annualized total return of 15.9 per cent while the index came in at 8.7 per cent.

Investors are advised to do their own research before investing in any of the stocks shown here.

CPMS Canadian Industry Relative Portfolio (Top 20)

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