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Number Cruncher

Stock screens for investment ideas from professional investors. Exclusive to subscribers of Globe Unlimited.

Traders work on the floor of the New York Stock Exchange Tuesday, July 3, 2012. (Richard Drew/AP)
Traders work on the floor of the New York Stock Exchange Tuesday, July 3, 2012. (Richard Drew/AP)


Quality stocks for volatile times Add to ...

What are we looking for?

With extremely low rates on guaranteed investments, income seekers and retirees are at the mercy of these volatile equity markets to try and eke out a respectable annual income.

My colleague, Sean Pugliese, an associate portfolio manager here at Wickham Investment Counsel, has put together a list of companies that generate an acceptable yield, with a low beta, and a market capitalization of over $1-billion.

The difference in Sean’s work and those of others, is that Sean has selected companies with low or stable earnings variability.

The screen

Beta is a number that describes the volatility of an asset in relation to the volatility of the market itself.

Individual companies are ranked according to how much they deviate from the macro market, and that macro market has a beta of 1.

High beta stocks, those being over 1, tend to be more volatile and riskier. All of the companies shown in the screen have betas of less than 1.

Unprecedented increases in stock market volatility during the past several years have led investors to seek out higher quality common stocks, hoping for a smoother ride and more consistent investment returns.

Intuitively it makes sense to believe higher quality stocks would perform better in times of market turmoil. Ideally, high quality stocks provide capital preservation in declining markets yet also participate broadly in market rebounds.

High quality stocks have less earnings variability, which supports share prices in times of market turmoil. However, the trade-off appears to be stocks that underperform in rising markets.

Earnings variability is a unique measure of risk describing the historical volatility of earnings over a number of years.

Low earnings variability for a company implies higher earnings predictability, and therefore less risk.

Earnings variability is not an indicator of historical growth or direction of earnings. It is, however, a very useful indicator of the historical dispersion of earnings.

High earnings variability is sometimes considered a negative sign as investors do not know if the company’s earnings in one year can be sustainable in the next, and therefore less certain of future earnings, and the all-important dividend.

Most firms have earnings variability of between 0 per cent and 40 per cent.

It is interesting to note in the table the earnings variability of Royal Bank, 0.44, and that of CIBC, 4.15.

As for yield, Telus has the lowest at 4 per cent, and Bell Aliant has the highest at 7.52 per cent.

The average yield of the portfolio is 5.2 per cent.

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Companies with low or stable earnings variability

Name Tickers Price $ (July 3) Market cap ($ mil.)
Royal Bank RY-T 53.09 76,542
Bank of Nova Scotia BNS-T 53.33 60,878
Bank of Montreal BMO-T 57.37 35,964
BCE Inc BCE-T 42.54 32,160
Transcanada Corp TRP-T 43.25 30,339
CIBC CM-T 72.71 29,488
Telus T-T 62.69 19,662
Power Financial PWF-T 25.99 18,129
Crescent Point Energy CPG-T 39.31 12,497
National Bank NA-T 74.64 12,019

Wickham Investment Counsel Inc.


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