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What are we looking for?

Favourites among equity analysts.

The screen

Although the dog days of summer are upon us, Street analysts continue to keep a laser-sharp focus on their coverage lists, updating estimates and forecasts to reflect the latest realities of the pandemic. For the investor, analyst estimates can provide a clear indication of sentiment on a stock – when we aggregate their estimates into a consensus. To this end, I use Morningstar CPMS to look for Canadian-listed companies that analysts favour by first ranking the 700 companies in our database on the following factors:

  • Three-month estimate revisions of earnings per share, or EPS (a sentiment indicator, measuring the median analyst consensus on fiscal year earnings against what it was three months prior. When this figure is positive it indicates that Street analysts are, on the whole, showing a bullish change in sentiment);
  • Current year’s estimated annual earnings growth rate (calculated as the median analyst EPS estimate for a company’s current fiscal year as a percentage change from the median EPS estimate from the previous fiscal year);
  • Next year’s estimated EPS earnings growth rate (similar to the above, but compares the median estimate for the following fiscal year against the estimate for the current fiscal year);
  • Three-year price beta (used here as a safety factor – remember that beta measures a stock’s historical sensitivity to movement in the benchmark. A stock with a beta less than one has historically moved less than the index in trending markets. As a safety factor, we prefer lower figures here.).

To qualify, companies must have a sector-relative debt-to-equity ratio less than 1.1 times (implying that the debt-to-equity of the company is close to, or lower than that of the sector to which it belongs). Additionally, only stocks actively covered by at least three analysts and a market capitalization greater than the median in our universe (today that figure is $400-million) were considered.

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More about Morningstar

Morningstar Research Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. Morningstar offers an extensive line of products and services for individual investors, financial advisers, asset managers, retirement plan providers and sponsors, and institutional investors. Morningstar Direct is the firm’s multi-asset analysis platform built for asset management and financial services professionals. Morningstar Canada on Twitter: @MorningstarCDN.

What we found

I used Morningstar CPMS to backtest this strategy from December, 1991, to July, 2020, using a maximum of 15 stocks with no more than three per economic sector. Once a month stocks were sold if their rank dropped below the top half of the universe based on the factors listed above, or if consensus three-month EPS estimate revisions fell by more than 15 per cent. Over this period the strategy produced an annualized total return of 15.6 per cent while the S&P/TSX Composite Total Return Index advanced 8.1 per cent on the same basis. On a year-to-date basis to July 31, the strategy has produced 6.7 per cent while the index lost 3.3 per cent.

Only 11 stocks meet the requirements to be purchased into the model today and they are listed in the table below.

This article does not constitute financial advice. It is always recommended to speak to a financial adviser or professional before investing in any of the products listed here.

Select TSX stocks showing positive analyst sentiment

RankCompanyTickerMkt. Cap. ($ Mil.)3M EPS Estim. Rev. (%)Curr't Yr. Estim. EPS Grth. Rate (%)Next Yr. Estim. EPS Grth. Rate (%)3Y Hist. BetaSector Rel. D/EDiv. Yld. (%)Ttl Rtn. from Month End, 12M Ago (%)Recent Price ($)
1Shopify Inc. SHOP-T147,733.81,469.5224.6-,365.11
2Pan Amer. Silver PAAS-T9,208.6115.637.8115.
3Trisura Group Ltd.TSU-T901.419.81,314.639.
4Centerra Gold Inc.CG-T4,871.830.8102.535.
5Galiano Gold Inc.GAU-T465.759.7144.3-
6Maple Leaf FoodsMFI-T3,720.416.
7Primo Water PRMW-T2,993.965.
8Metro Inc.MRU-T15,
9Thomson ReutersTRI-T49,992.01.741.910.
10Sprott Inc.SII-T1,385.432.760.322.
11Hardwoods Dist.HDI-T458.6183.315.

Source: Morningstar CPMS

Note: The large figures shown for SHOP (three-month EPS estimate revision) and TSU (current year estimate EPS growth rate) are accurate and their extreme values have been accounted for in the ranking process.

Ian Tam, CFA, is director of investment research for Morningstar Canada.

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