What are we looking for?
Highly profitable and less volatile Canadian companies.
The screen
The results from the Brexit vote shocked worldwide markets and investors found themselves looking to replace their riskier holdings with safer alternatives. Although the market reaction was likely overdone, profitable companies that have demonstrated stable earnings and lower price volatility may continue to be in high demand.
In order to identify Canadian companies that may benefit from an ongoing flight to safety, my colleague Lawrence Ullman and I used Morningstar CPMS to find the top 20 companies above $500-million in market cap and with the best mix of:
- Low five-year beta (a beta of less than one would indicate the stock is less volatile than the market in general);
- High earnings stability;
- Return on equity;
- Three-month consensus estimate revision of earnings per share (cannot be worse than minus 15 per cent).
Selections were limited to dividend-paying companies and no more than four stocks per sector were allowed.
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
Using CPMS, we performed a back-test starting May 31, 2006, selecting an equally weighted portfolio of the top 20 qualifying stocks. Universe rankings were recalculated monthly and holdings would be replaced if their rank fell outside of the top 30 per cent. Over the entire period, this strategy would have generated an annualized total return of 12.3 per cent compared with 4.8 per cent for the S&P/TSX composite total return index. Over the past year, this strategy would have posted a return of 11.8 per cent compared with a loss of 3.3 per cent for the index.
The opinions expressed in this report are the opinions 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 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.