What are we looking for?
U.S. companies that are growing their sales. While earnings grab investors' attention, no firm can perpetually expand its profits if revenue remains stagnant.
In this plodding recovery, many enterprises are facing tough markets and cautious customers. So focusing on businesses with surging sales may provide a way to identify stocks with a scarce resource – growth potential.
How we did it
Our friend, Craig McGee, senior consultant at CPMS Morningstar Canada, began by looking at companies that are members of the S&P 500 (for large U.S. firms), S&P 400 (mid-sized firms) or S&P 600 (small firms). He broke out the 20 firms with the highest sales growth over the past five years. To ensure adequate diversification, he limited any one sector to no more than four stocks.
The accompanying table shows price-to-earnings ratios and yields as background information, but these elements weren't factors in selecting the stocks.
More about Morningstar
Morningstar 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.
What we found
Using the CPMS Backtest service, Mr. McGee looked at what would happened if he had selected a portfolio based on the above principles on Jan. 1, 1994, then refreshed the portfolio each year with updated selections.
He found that the strategy would have produced a total return of 20.3 per cent a year, well ahead of the 8.8 per cent total return generated over the same period by the S&P 500.
Remember, though, that these results do not take into account taxes or trading fees. As always, you should do your own research before buying any of the stocks listed here. And keep in mind that strategies that worked in the past don't always continue to perform well.