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What are we looking for

Canadian analyst favourites prior to reporting season.

The screen

In the next 30 days, about 500 of the 700 companies in the Morningstar CPMS Canadian database will be reporting their latest quarterly earnings as we head into the fourth quarter reporting season in Canada. During this time, Street analysts will be updating their predictions, forecasts and general sentiment of the stocks that they cover as new information is revealed. This week, I take a snapshot at Street sentiment in Canada by looking to stocks that the institutional sell side favours in aggregate. To do this, I ranked stocks on the following metrics:

  • Ninety-day estimate revisions (the current median consensus estimate for fiscal year 2018 earnings per share [EPS] against what it was 90 days ago);
  • Estimated growth rate of earnings (the median EPS estimate for a company’s current fiscal year as a percentage change from the median EPS estimate from the previous fiscal year);
  • Ninety-day up/down revision ratio (the number of analysts that revised their estimate upward minus the number of analysts that revised their estimates downward divided by the total number of active analysts, positive figures preferred);
  • Variation in estimates (a statistical measure essentially looking at the dispersion of active estimates, lower figures preferred);
  • Five-year price beta against the S&P/TSX composite index (recall that the companies with a beta lower than one has historically moved less than the index in trending markets. Here, we prefer lower beta to reduce risk).

In today's analysis, only the largest 250 names in Canada were considered (measured by market capitalization), excluding unit trusts. In addition, only companies with at least five active analyst estimates were considered.

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 May, 2002, to September, 2017. During this process, a maximum of 20 stocks were purchased with a maximum of five per economic sector. Stocks are sold if their rank falls below the top 50 per cent of our universe. When sold, the positions are replaced with the highest ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 12.2 per cent while the S&P/TSX composite total return index produced 7.6 per cent. The top 13 appear in the table above.

It's recommended 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.

Analysts' favourite Canadian stocks

RankCompanyTickerMorningstar SectorMarket Cap ($Mil)3M EPS Estim. Revision (%)90 Day Up/Down Revision Ratio (%)Current Yr Estim. EPS Growth Rate (%)5Yr Historical BetaVar. in EPS Estimates # of Active AnalystsNext Report Date Yield (%)
1Empire Company Ltd.EMP.A-TCons. Defensive 3,790.1 19.3100.046.3-0.311.5712/14/171.9
2Chorus Aviation Inc.CHR-TIndustrials 1,074.2 16.9100.024.60.610.7811/8/175.6
3BlackBerry Ltd.BB-TTechnology 7,531.8 21.950.0142.11.125.0812/20/170.0
4Thomson Reuters Corp.TRI-TFin. Services 41,194.0 4.0100.
5Toronto-Dominion BankTD-TFin. Services 131,382.6 3.0100.
6Toromont Industries Ltd.TIH-TIndustrials 4,557.4 12.6100.
7CI Financial Corp.CIX-TFin. Services 7,235.4 2.6100.
8Dollarama Inc.DOL-TCons. Defensive 15,409.2 4.3100.
9WestJet Airlines Ltd.WJA-TIndustrials 3,136.0 22.166.717.30.69.61210/31/172.1
10Industrial AllianceIAG-TFin. Services 6,006.8 0.888.
11Constellation SoftwareCSU-TTechnology 15,209.8 1.375.
12Pan American Silver PAAS-TBasic Materials 3,322.4
13Canadian Tire Corp.CTC.A-TCons. Cyclical 10,614.6 2.3100.
14Gildan ActivewearGIL-TCons. Cyclical 8,569.8 1.354.511.80.51.51111/2/171.2
15Alimentation Couche-TardATD.B-TCons. Defensive 33,436.4 5.8-33.323.2-0.94.6911/21/170.6
16Maple Leaf Foods Inc.MFI-TCons. Defensive 4,428.4 6.0100.
17Fortis Inc.FTS-TUtilities 19,005.8 0.411.
18Torex Gold ResourcesTXG-TBasic Materials 1,608.1 12.044.453.71.323.3911/9/170.0
19Premium Brands HoldingPBH-TCons. Defensive 3,062.1 5.875.
20Norbord Inc.OSB-TBasic Materials 4,385.6 33.485.7-

Source: Morningstar Canada