What are we looking for?
Large-cap Canadian names that have historically weathered market volatility.
The screen
What a week it has been. The outcome of the U.S. presidential election was certainly unexpected for many investors, likely resulting in increased volatility in many financial markets. This week, I used Morningstar CPMS to create a conservative equity strategy that ranks stocks for the Canadian market based on the best combination of the following factors:
- Five-year and three-year historical beta (recall that stocks with a beta less than one move less than the market when the index is trending. In today’s strategy, lower betas are preferred);
- One-year standard deviation of returns (this is a measure of price volatility – again, lower measures preferred);
- Earnings variability (which measures how volatile a company’s earnings have been historically, lower numbers preferred here);
- Price-to-earnings;
- Price-to-book;
- Three-month estimate revisions (today’s consensus estimate for earnings per share versus the estimate three months ago).
To qualify, stocks must have a market capitalization of $1.2-billion or more. Unit trusts were excluded in this analysis.
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 CPMS to back-test the strategy from December, 1999, to October, 2016. During this process, a maximum of 20 stocks were purchased and equally weighted with a maximum of four stock a sector. Stocks would be sold if they fell outside the top 25 per cent of the ranked universe. Over this period, the strategy produced an annualized total return of 11.7 per cent while the S&P/TSX composite total return index advanced 6 per cent.
In 2008, the strategy lost 19 per cent while the S&P/TSX composite lost 33 per cent. The top 20 stocks that qualify for purchase today are listed in the table below.
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.