What are we looking for?
Companies with steady, growing earnings and low price volatility amid stormy markets.
The screen
For the cautious investor, the recent volatility in the equity markets has been a cause for concern. This week I focus on companies that have shown a history of consistent and growing earnings, but also exhibit low price volatility, particularly over the past 90 days. A fairly common metric used to measure volatility is the standard deviation of daily price return (lower standard deviations imply lower volatility).
From the fundamental perspective, I also look for companies with low earnings variability, implying consistent earnings over time. The strategy ranks stocks based on the best combination of:
- five-year EPS growth;
- Standard deviation of daily price returns (measured over 90 days, annualized);
- five-year beta (lower is better);
- earnings variability score (lower is better).
Qualifying stocks have a market cap of $800-million or above. Remember, a stock with a beta of one has historical tendency to move in line with the market during trending periods, while stocks with beta less than one have moved less than the market during trending periods.
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 July, 1999, to July, 2015. During this process, 20 stocks were purchased and equally weighted with a maximum of five stocks a sector. Stocks would be sold if they fell outside the top 30 per cent of the ranked universe. Over this period the strategy produced an annualized total return of 11.1 per cent while the S&P/TSX total return index produced 7.2 per cent. The top 20 qualifying stocks are listed in the table.
As always, investors are advised to conduct their own independent research before purchasing shares in the companies shown.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.