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What are we looking for?

Picks outside of the S&P/TSX composite index.

The screen

To create today's strategy, I took a hybrid approach using Morningstar CPMS considering growth, value, momentum and stability factors. Because these may be less familiar companies, in all cases I've used trailing figures as a way to avoid relying on analyst estimates. Specifically, the strategy ranks stocks on the best mix of the following:

  • Price to trailing earnings (a value metric, low values preferred);
  • Latest reported return on equity (a profitability metric, higher figures preferred);
  • Six and nine-month price change;
  • Five-year historical beta (companies with a beta of less than one tend to move less than the benchmark in trending markets – here, lower beta is preferred);
  • Quarterly earning momentum (compares the latest four quarters of reported earnings against the same figure one quarter ago).

To qualify, stocks must not be part of the S&P/TSX composite index. If the company pays a dividend, we also apply a screen such that the payout ratio on trailing earnings must not exceed 80 per cent.

As liquidity tends to be a concern for companies outside of the index, I required a minimum average monthly trading volume of 0.8 million or more. (This limit excludes the bottom one-third of liquidity in the CPMS database, which today consists of 720 companies).

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 backtest this strategy from January 1988, to February, 2017. During this process, a maximum of 15 stocks were purchased with a maximum of four stocks an economic sector. Stocks are sold if their rank fell below the top 35 per cent of the universe. When sold, they were replaced with the highest ranked stock not already owned in the portfolio, keeping in mind the aforementioned sector limits.

Over this period, the strategy produced an annualized total return of 23.3 per cent, while the BMO small cap total return index advanced 7.8 per cent. Today, only 13 stocks qualify for purchase into the strategy and are listed in the accompanying table.

As always, investors are encouraged to 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.

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Stocks outside the S&P/TSX composite worth a look

RankCompanyTickerMarket Cap ($Mil)Trailing P/E Trailing ROE (%)6M Price Change (%)9M Price Change (%)5Y Historical BetaQuarterly Earnings Momentum (%)Trailing Dividend Payout Ratio (%)Shares Traded in the last Month (Mil)Yield (%)
1Timmins Gold Corp.TMM-T172.53.927.6-20.52.13.234.0022.20
2Gluskin Sheff + Assoc.GS-T553.513.434.011.26.31.25.975.33.35.6
3TIO Networks Corp.TNC-X286.531.415.754.545.60.03.6012.40
4Sprott Resource HoldingSRHI-T94.411.24.516.9-7.52.060.208.80
5Orsu Metals Corp.OSU-X4.73.87.3-28.625.00.77.903.00
6ZCL Composites Inc.ZCL-T418.019.916.522.151.41.38.247.01.73.5
7Rogers Sugar Inc.RSI-T591.213.716.5-5.86.40.66.978.23.15.7
8RDM CorporationRC-T122.723.011.224.524.80.32.233.93.61.8
9Exco Technologies Ltd.XTC-T500.410.816.9-2.9-3.70.61.225.80.82.7
10Silvercorp Metals Inc.SVM-T748.319.312.36.752.03.739.74.323.00.4
11Savaria CorporationSIS-T489.237.017.618.762.21.13.959.11.01.9
12Imvescor RestaurantIRG-T204.215.514.28.724.80.9-3.541.32.02.7
13Sprott Inc.SII-T561.613.811.1-6.6-12.10.84.973.44.05.3

Source: Morningstar Canada

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