Craig McGee is a senior consultant at Morningstar Canada.
What are we looking for?
Profitable companies with the highest growth expectations for the coming year.
The screen
Though we can look at growth using a variety of metrics, I'll focus on top-line sales, operating cash flow and operating earnings. Specifically, I scanned the CPMS Canadian database for stocks with the best combination of the following metrics:
- Expected year-over-year growth in total sales;
- Expected year-over-year growth in cash flow per share;
- Expected year-over-year growth in earnings per share.
It can actually be dangerous to look at growth rates on their own since firms with the loftiest expectations are prone to experience the deepest cuts in a market downturn.
For this reason, I filtered the results to return only stocks that have had a positive change in their consensus estimates for sales, cash flow and earnings over the past 90 days. Results were also restricted to stocks with market cap greater than $200-million. Only companies with positive sales, cash flow and earnings were included.
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
All but one stock out of the 20 came from the energy sector (the outlier being specialty packaging company CCL Industries). After experiencing declining earnings between May, 2012, and October, 2013, the sector has had an impressive turnaround and has been posting positive year-over-year earnings growth since March of this year.
As demand for energy resources continues to increase and with political unrest in the Middle East driving up prices, the energy sector may be primed for continued growth.
Investors are advised to do further research before investing in any of the stocks listed here.