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number cruncher

What are we looking for?

U.S. consumer stocks with showing profits and paying dividends.

The screen

As we roll into the holiday season, consumers are opening their wallets to spend their hard earned dollars on goods and services to treat the ones closest to them (or themselves!). To look for profitable companies in this space, I use Morningstar CPMS to rank stocks in the consumer discretionary and consumer staples sectors (today this list consists of 461 companies) on the following factors:

  • Three-month estimate revision (today’s consensus estimate compared with the same figure at month-end three months ago, higher figures preferred);
  • Deviation of earnings per share over the past five years (a consistency measure of a company’s earnings, lower figures preferred);
  • Annual earnings momentum (latest four quarters of operating earnings compared with the same figure four quarters ago);
  • Quarterly earnings momentum (latest four quarters of operating earnings compared with the same figure one quarter ago);

To qualify, companies must have three active analysts covering the stock and must pay a yield of 1.3 per cent or greater (this figure represents the top two-thirds of stocks paying a yield in our universe of companies). In addition, companies must show positive return on equity in the latest reported quarter.

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 December, 1995, to November, 2017. During this process, a maximum of 10 stocks were purchased and equally weighted. Stocks would be sold if their rank fell below the top 25 per cent of the universe or if the payout ratio on dividends exceeded 100 per cent of forward earnings. When sold, the positions were replaced with the highest ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 13.1 per cent while the S&P 500 discretionary, staples and overall total return indexes advanced 9.9 per cent, 10.6 per cent and 9.7 per cent, respectively. The top 10 stocks that meet our requirements for purchase today are listed in the accompanying table.

As always, it is recommended that 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.

A portfolio of profitable U.S. consumer stocks

RankCompanyTickerSector Market Cap ($Mil U.S.)3M Estim. Revision (%)Qtrly Earns Momentum (%)Annual Earns Momentum(%)Trailing ROE (%)Earns DeviationFwd Payout Ratio (%)Div. Yield (%)
1Polaris Industries Inc.PII-NCons. Disc. 8,002.9 8.126.714.932.722.241.21.8
2PepsiCo Inc.PEP-NCons. Staples 166,959.6
3Walgreens BootsWBA-QCons. Staples 72,697.6
4Home Depot Inc.HD-NCons. Disc. 212,296.7
5Mondelez InternationalMDLZ-QCons. Staples 64,079.4
6Penske Automotive GroupPAG-NCons. Disc. 4,127.2
7NutriSystem Inc.NTRI-QCons. Disc. 1,493.0 1.611.754.251.014.630.61.4
8Procter & Gamble Co.PG-NCons. Staples 227,945.7
9Wal Mart Stores Inc.WMT-NCons. Staples 286,462.3 1.50.5-
10Carters Inc.CRI-NCons. Disc. 5,316.8

Source: Morningstar Canada