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What are we looking for?

Seasonally strong Canadian stocks for the fourth quarter.

The screen

The S&P/TSX composite index has been exceeding expectations this year, posting a year-to-date total return of 15.8 per cent, and all sectors but health care have generated positive returns. To end the year, the market may still have room to run.

Looking back, the period from October through December has historically been the strongest quarter of the year – the median return for the fourth quarter dating back to 1956 has been 3.8 per cent and it has been positive 80 per cent of the time. The sectors that have made the biggest contributions include telecommunications, information technology, industrials and financials, with median fourth-quarter returns of 7.5 per cent, 7.3 per cent, 7.1 per cent and 7.0 per cent, respectively, since the inception of GICS sector classifications in 1988.

In order to uncover high quality Canadian companies from seasonally strong sectors with room to grow, my colleague Lawrence Ullman and I used Morningstar CPMS to find the top 20 stocks in the telecom, IT, industrials or financials sectors of the S&P/TSX with the best mix of:

  • Latest 12-month return on equity;
  • Five-year average return on equity;
  • Five-year earnings per share growth rate;
  • Three-month consensus earnings estimate revision;
  • Earnings yield;
  • One-year total return.

More about the Ullman Group

The Ullman Group is an independent provider of strategic private capital management services to high-net-worth individuals, corporations, endowments, charities and foundations.

What we found

We used Morningstar CPMS to perform a back-test starting Aug. 31, 2006, initially selecting an equally weighted portfolio of the top 20 qualifying stocks and each month replacing those that are no longer in the top 30 per cent of the rankings or if their earnings revisions fell by more than 15 per cent.

Over the 10-year period, this strategy would have generated an annualized total return of 7.4 per cent compared with 4.9 per cent for the S&P/TSX composite total return index. Over the past year, this strategy would have returned 11.8 per cent while the index would have returned 8.7 per cent.

The opinions expressed in this report are those of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. Investors should contact a professional or do their own research before investing in any of the stocks shown here.

Craig McGee, CFA, is a portfolio manager and Lawrence Ullman, MBA, is a director, wealth management and portfolio manager with the Ullman Group at Richardson GMP in Toronto.

Richardson GMP Ltd. is a member of the Canadian Investor Protection Fund. Richardson is a trademark of James Richardson & Sons Ltd. GMP is a registered trademark of GMP Securities LP. Both used under licence by Richardson GMP Ltd.

High quality Canadian firms in seasonally strong sectors