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What are we looking for?

Canadian-listed stocks combining consistently growing fundamentals and recent share price momentum for the steady growth investor.

The screen

The year is off to a positive but jittery start, almost making back the losses seen in 2018. Year-to-date, the S&P/TSX Composite Total Return Index has produced 8.1 per cent while the same index lost 8.9 per cent in 2018. That said, many investors are likely still wary of market volatility. This week’s strategy looks for names that have shown consistently growing fundamentals and are also showing some shorter-term price momentum. To find these names, I took the largest 250 companies in Canada by market cap (excluding real estate investment trusts) and ranked them on the following metrics:

  • Five-year normalized growth in sales, cash flow and earnings (on average, how much each of these has grown each year over the past five years);
  • Latest reported return on equity;
  • Three-month (not shown) and nine-month price changes (simply measuring the momentum of the stocks, higher figures preferred).
  • Five-year deviation of earnings and return on equity (not shown – a statistical measure showing how volatile a company’s earnings have been, lower figures preferred).

Each stock’s dividend yield and 12-month price change are shown for informational purposes.

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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.

What we found

I used Morningstar CPMS to back test this strategy from April, 1995, to December, 2018. During this process, a maximum of 15 stocks were purchased and equally weighted with no more than three for each economic sector. Once a month, stocks were sold if their rank fell below the top 25 per cent of the ranked universe of 250 companies. 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 11.7 per cent while the S&P/TSX Composite Total Return Index advanced 7.8 per cent. In calendar year 2018, the strategy produced 0.3 per cent while the index, as stated above, lost 8.9 per cent.

The stocks that meet my requirements are listed in the accompanying table. It is always recommended to speak to a financial adviser or investment professional before investing.

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

Select TSX stocks showing consistent growth in sales, earnings & cash flow

Rank Company Ticker Market Cap ($Mil) Trailing ROE (%) 5Yr EPS Growth (%/yr) 5Yr Sales Growth (%/yr) 5Yr CF Growth (%/yr) Price Chg from Month End, 9M Ago (%) Price Chg from Month End, 12M Ago (%) Recent Price ($) Div. Yield (%)
1 Kirkland Lake Gold Ltd. KL-T 8,442.6 20.7 45.5 20.2 55.0 79.6 117.0 40.23 0.4
2 Tucows Inc. TC-T 1,002.3 30.5 43.2 42.5 134.0 16.2 41.5 94.42 0.0
3 Great Canadian Gaming Corp. GC-T 3,122.1 28.7 24.2 24.1 22.9 42.7 42.9 52.3 0.0
4 MTY Food Group Inc. MTY-T 1,758.4 13.8 18.1 28.4 27.1 51.5 31.8 69.86 0.9
5 Bank of Nova Scotia BNS-T 91,194.3 15.0 7.0 5.6 12.7 -5.8 -9.1 74.32 4.6
6 CCL Industries Inc. CCL-B-T 9,870.9 21.3 28.4 23.2 25.8 -10.8 -5.6 55.53 0.9
7 CGI Group Inc. GIB-A-T 21,421.3 18.3 10.0 4.1 3.4 15.8 22.4 86.16 0.0
8 National Bank of Canada NA-T 20,586.9 18.1 7.6 5.6 7.1 0.5 -4.0 61.31 4.2
9 Constellation Software CSU-T 20,782.1 88.2 29.7 24.4 26.6 6.9 23.3 980.68 0.5
10 Waste Connections Inc. WCN-T 28,329.6 10.0 28.2 22.6 24.9 15.9 21.6 107.51 0.8
11 Alimentation Couche-Tard ATD.B-T 40,140.1 21.1 22.9 14.3 24.5 28.1 10.5 71.13 0.6
12 Element Fleet Management EFN-T 3,036.8 9.3 16.3 35.1 46.3 44.5 -15.5 7.01 2.6
13 Magna International Inc. MG-T 23,058.0 20.5 18.7 14.3 19.8 -9.1 -1.9 68.93 2.6
14 CAE Inc. CAE-T 7,430.0 14.3 13.1 7.2 11.0 15.1 23.0 27.93 1.4

Source: Morningstar CPMS

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