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What are we looking for?

Canadian companies that have been expanding their earnings, but still trade at attractive prices.

How we did it

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Craig McGee, senior consultant at CPMS Morningstar Canada, turned to the CPMS Canadian database to seek companies with growing earnings that also trade at reasonable multiples of their sales and earnings.

Using his own ranking system, he looked for the 20 stocks with the best combination of the following metrics:

-earnings stability;

-a low price-to-sales ratio (based on the past year);

-a low price-to-earnings ratio (again, based on the past year);

-a high rate of earnings growth over the past five years;

-strong earnings momentum;

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-positive earnings surprises;

-positive revisions over the past three months to analysts' earnings estimates.

He required each company in the list to have a market capitalization that was in the largest quarter of the CPMS database. He eliminated any firm with negative revisions to analysts' earnings estimates. To ensure diversification, he allowed no more than five stocks from any single sector.

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.

What we found

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Mr. McGee back-tested the strategy to see how it would have performed from Dec. 31, 1991, until July 31, 2013. He assumed that the portfolio's holdings would have been reviewed monthly and that any stock falling outside the top 30 per cent of rated equities would have been replaced.

He found the strategy would have generated a return of 13.7 per cent a year during this period, compared to 5.2 per cent for the TSX Total Return Index, while also experiencing much lower volatility. Remember these results do not incorporate trading costs. Also, past performance does not guarantee future returns. Still, this screen does point to many firms that should be of interest to those who like to invest in reasonably priced, growing companies.

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