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What are we looking for?

Equity-analyst favourites in Canada showing steady earnings.

The screen

This week I use Morningstar CPMS to look for companies with which the Street shows positive sentiment, while at the same time focusing on stocks that have not shown substantial volatility in their historical reported earnings. To find these companies, I rank stocks in the CPMS Canadian database by:

  • Change in consensus earnings-per-share (EPS) estimates for the current fiscal year compared with the same figure at month-end one month, two months, three months and six months ago – higher figures preferred;
  • Historical variability of reported operating EPS (a statistical measure showing how volatile a company’s reported earnings have been – lower figures preferred).

To qualify, companies must have at least three analysts actively covering the stock.

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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 July, 1992, to March, 2018. During this process, a maximum of 15 stocks were purchased and equally weighted with no more than four stocks for each economic sector. Once a month, stocks were sold if their rank fell below the top 35 per cent of the ranked universe (today this universe consists of 710 stocks). When sold, the positions were replaced with the highest ranked stock not already owned in the portfolio keeping in mind the aforementioned sector limits. Over this period, the strategy produced an annualized total return of 13.3 per cent while the S&P/TSX Composite Total Return Index advanced 8.6 per cent.

The stocks that meet our requirements for purchase are listed in the table below. It is always recommended that you speak to a financial adviser or investment professional before investing.

Select TSX-listed stocks with less volatile historical earnings

RankCompanyTickerMorningstar SectorMarket Cap ($Mil)1M Estim. Rev. (%)2M Estim. Rev. (%)3M Estim. Rev. (%)6M Estim. Rev. (%)Earns VariabilityNo. of Active AnalystsDiv. Yield (%)Recent Price ($)Price Chg from Month End 12M Ago (%)
1Husky Energy Inc.HSE-TEnergy 19,087.2 23.366.766.7402.57.981.5818.9920.5
2Home Capital GroupHCG-TFin. Services 1,137.9 5.01.56.30.32.99n/a14.1876.4
3Corus EntertainmentCJR.B-TCons. Cyclical 1,294.8 7.97.97.9-1.85.9917.986.34-52.7
4Cdn Natural ResourcesCNQ-TEnergy 56,100.5 12.139.039.0107.510.292.9345.775.3
5PHX Energy ServicesPHX-TEnergy 129.6 10.010.05.030.08.65n/a2.22-30.4
6Genworth MI Canada Inc.MIC-TFin. Services 3,639.0 1.02.23.48.62.964.7039.9817.9
7Bank of Nova ScotiaBNS-TFin. Services 92,868.9 0.00.32.42.11.7104.2377.522.2
8PrairieSky Royalty Ltd.PSK-TEnergy 6,932.3 19.019.013.633.913.062.6529.41-1.1
9National Bank of CanadaNA-TFin. Services 20,386.0 0.00.91.33.32.4104.0159.8912.9
10Sherritt InternationalS-TBasic Materials 488.2 50.050.042.522.513.64n/a1.2336.7
11Shaw CommunicationsSJR.B-TComms. Services 13,453.4 4.34.34.8-4.77.5104.4126.85-7.2
12CGI Group Inc.GIB.A-TTechnology 18,843.9 1.50.72.64.44.111n/a73.7411.9
13Methanex Corp.MX-TBasic Materials 7,073.0 10.612.149.183.114.171.9984.4234.6
14BCE Inc.BCE-TComms. Services 48,404.7 0.00.0-0.6-2.32.6115.6253.72-13.6
15Domtar Corp.UFS-TBasic Materials 3,810.4 5.923.89.228.413.673.7758.628.3

Source: Morningstar Canada

Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.

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