What are we looking for?
The best stocks for profit growth in Canada.
More about today's screen
Investors can often tie themselves into knots looking for strategies to beat the market. This is a screen that is beautiful in its simplicity. We're looking for stocks that have grown earnings per share every year in the past five years. That's it.
Morningstar CPMS tracks about 680 of the largest stocks in Canada and says only 13 stocks qualify in the screen.
"This is remarkable given the volatility of overall TSX earnings over this period," said Jamie Hynes, senior consultant at CPMS. "From November, 2006, to January, 2010, S&P/TSX composite earnings fell 48 per cent."
The median stock on this list grew earnings by 13 per cent annually, versus 1 per cent for the S&P/TSX, Mr. Hynes said.
More about today's screen
Morningstar CPMS helped us find candidates by sorting through its list of 680 Canadian stocks in search of what Mr. Hynes calls "bottom-line growers" - stocks that have grown their earnings each and every calendar year, 2006 through 2010. It's important to note that this screen uses adjusted earnings, which remove all unusual and non-recurring items.
More about CPMS
CPMS is an equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 680 of the largest and more liquid Canadian stocks, plus another 2,100 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company's quarterly results to make sure screens can perform correctly.
What did we find out?
This surprisingly short list of stocks that have consistently grown their earnings have also grown the bank accounts of their investors. Every name on this list, except Shoppers Drug Mart Corp., has outperformed the TSX since December, 2005. The median stock on this list is up 10.3 per cent annualized over this period compared with just 4.7 per cent annualized for the TSX total return index.
Past performance, of course, is no guarantee of future results. But several stocks on the list boast attractive dividend yields and strong returns on equity, two qualities that are attractive to many investors.
Focusing on companies that have achieved steady earnings growth over the past few years is a good way to begin your search for stocks that have the right ingredients to do well over the next few years.
Scott Adams