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What are we looking for?

High quality companies with predictable sales and cash flow.

The screen

Markets have surged over the past three months as investors have been moving their allocations back to riskier equities.

Expected near-term volatility is currently near all-time lows, as measured by the CBOE volatility index (VIX), but traders continue to react to news and earnings reports with more scrutiny than ever. With today's potentially inflated market valuations, any significant surprise could lead to a sharp move as investors take profits off the table.

In order to identify some higher quality companies with more predictable revenue and cash flow that could offer more stability, Lawrence Ullman and I used Bloomberg to rank firms from the S&P/TSX composite index or the S&P 500 index with the best mix of:

  • Sales variability (measured as the standard deviation of sales a share over the past five years divided by the median value of sales per share);
  • Free cash flow variability;
  • Five-year beta;
  • Free cash flow yield (forward 12-month FCF as a percentage of latest price);
  • Return on equity.

Qualifying stocks must have a flat or positive three-month consensus earnings estimate revision and five-year beta less than one, suggesting the stock has been less volatile than the market.

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 Bloomberg to perform a back-test starting Jan. 31, 2007, selecting an equally weighted portfolio of the best 20 companies. The portfolio would be reselected and rebalanced quarterly.

Over the 10-year period, this strategy would have generated an annualized total return, in Canadian dollars, of 11.8 per cent compared with 8.1 per cent for the S&P 500. The S&P 500 low volatility index, which is designed to measure the performance of the 100 least volatile stocks of the S&P 500 index, has posted a total return (in Canadian dollars) of 9.6 per cent over the same period.

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.

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.

Select companies with steady sales and cash flow

RankCompanyTickerMarket Cap ($Bil)Sales VariabilityFCF Variability5 Yr BetaFCF Yield (%)ROE (%)3M EPS Revision (%)Yield (%)
1Rogers CommunicationsRCI.B-T29.
2Campbell Soup Co.CPB-N19.
3Quebecor Inc.QBR.B-T4.80.050.400.376.
4Corus EntertainmentCJR.B-T2.
5Intertape PolymerITP-T1.50.010.300.
6Target Corp.TGT-N35.80.040.400.749.
7North West Co.NWC-T1.
8Waste ManagementWM-N30.
10CI Financial CIX-T7.
11Coach Inc.COH-N10.30.060.300.675.721.80.03.7
12Marsh & MclennanMMC-N36.
13Hershey Co.HSY-N22.70.080.480.554.7103.94.42.3
14Merck & Co.MRK-N177.
15Great Cdn GamingGC-T1.50.170.340.598.722.210.50.0
16United ContinentalUAL-N23.
17Gap Inc.GPS-N9.
18Sysco Corp.SYY-N28.70.080.380.684.927.54.72.5
19Centurylink Inc.CTL-N13.
20FLIR SystemsFLIR-Q4.

All market cap figures in local currency; Source: Bloomberg