What are we looking for?
Canadian-listed stocks showing consistent profits.
One of the key ratios to measure profit is return on equity, which is net income (or bottom line) of the company divided by the book value of shareholder's equity. In other words, this ratio measures the return that is generated to owners of the company's stock. This week, I combine the following time periods and measures of ROE to rank Canadian-listed equities. Today, the CPMS Canadian universe consists of 700 companies.
- Latest forward-looking ROE versus the sector median (a figure of 7.1 per cent, for example, implies that the company’s forward ROE is 7.1 per cent higher than that of the sector to which it belongs, higher figures preferred);
- Average ROE over the trailing five-year and 10-year time frames;
- Standard deviation of ROE over the trailing five-year and 10-year time frames (this measures how volatile a company’s reported ROE is over those periods, lower figures preferred).
To qualify, companies must have three active analysts covering the stock and a debt-to-equity ratio less than that of the sector median to avoid overly leveraged companies (a figure of 0.7, for example, implies that the company's D/E ratio is 30 per cent lower than the median of the sector to which it belongs).
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 Morningstar CPMS to back-test this strategy from December, 1995, to November, 2017.
During this process, a maximum of 10 stocks were purchased with a maximum of two companies a sector to ensure reasonable diversification across the economy. Stocks would be sold if their rank fell below the top 25 per cent of the universe. When sold, the positions were replaced with the highest-ranked stock not already owned in the portfolio.
Over this period, the strategy produced an annualized total return of 13.1 per cent while the S&P/TSX composite total return index advanced 8.3 per cent. The top 10 stocks that meet our requirements for purchase today are listed in the accompanying table.
As always, it is recommended that investors 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.
A portfolio focused on return on equity
|Rank||Company||Ticker||Market Cap ($Mil)||Morningstar Sector||Fwd ROE Rel. to Sector Median (%)||10Yr Avg ROE (%)||Standard Dev. ROE (10Yr)||5Yr Avg ROE (%)||Standard Dev. of ROE (5Yr)||D/Equity Rel. to Ind. Median||# of Active Analysts||Div. Yield (%)|
|1||Computer Modelling Group||CMG-T||785.3||Technology||32.6||52.8||7.6||49.7||5.7||0.0||8.0||4.1|
|2||National Bank of Canada||NA-T||21,561.8||Financial Services||7.1||18.5||1.0||18.0||0.8||0.0||10.0||3.8|
|3||Equitable Group Inc.||EQB-T||1,150.2||Financial Services||4.5||16.9||1.1||17.2||0.5||0.4||8.0||1.4|
|4||Westshore Terminals||WTE-T||1,800.2||Basic Materials||18.8||20.8||5.1||23.4||3.2||0.0||5.0||2.5|
|5||BCE Inc.||BCE-T||55,458.7||Communication Services||1.6||19.0||4.5||22.4||1.3||0.8||11.0||4.7|
|6||Toromont Industries Ltd.||TIH-T||4,468.7||Industrials||10.6||17.7||5.0||20.0||3.0||0.4||7.0||1.4|
|7||Metro Inc.||MRU-T||9,181.6||Consumer Defensive||6.4||17.3||2.3||19.0||1.9||0.7||4.0||1.6|
|8||Saputo Inc.||SAP-T||16,961.9||Consumer Defensive||5.7||19.4||2.9||18.9||3.2||0.5||8.0||1.5|
|10||Transcontinental Inc.||TCL.A-T||2,108.7||Consumer Cyclical||1.9||16.3||3.7||19.7||1.6||0.5||7.0||2.9|
Source: Morningstar Canada