What are we looking for?
Analyst favourites in the U.S. market.
The screen
As we roll into the latest stock reporting season in the United States, investors exposed to this market will likely be paying close attention to companies that meet, beat or miss earnings. Globe Investor recently published an article about street sentiment on this topic as well. With this in mind, I used Morningstar CPMS to create a strategy that looks for analyst favourites by ranking stocks on:
- 30-, 60- and 90-day analyst earnings-per-share revisions (which compare the current median consensus EPS estimate with the same figure 30, 60 and 90 days ago);
- The current year’s expected year-over-year EPS growth rate (the median EPS estimate for a company’s current fiscal year as a percentage change from the median EPS estimate from the previous fiscal year);
- Next year’s expected year-over-year EPS growth rate (calculated as the median EPS estimate for a company’s 2017 fiscal year as a percentage change from the median EPS estimate from the 2016 fiscal year);
- Earnings variability (five-year standard deviation of reported EPS). Earnings variability is a measure of earnings consistency; companies exhibiting consistent earnings will have a lower number, and are preferred.
To qualify, companies must have at least nine analysts actively covering the stock.
More about Morningstar
Morningstar Research 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
I used CPMS to back-test thestrategy from April, 2004, to March, 2016. During this process, 20 stocks were purchased and equally weighted with a maximum of five stocks a sector. Stocks would be sold if they fell outside the top 25 per cent of the ranked universe. Over this period, the strategy produced an annualized total return of 14.5 per cent while the S&P 500 total return index advanced 7.6 per cent. Stocks that qualify for purchase into the strategy today are listed in the accompanying table.
As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.