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number cruncher

What are we looking for?

Profitable Canadian-listed companies exhibiting a history of steady fundamentals.

The screen

As the chaos continues in Ukraine, the energy-heavy S&P/TSX Composite Index seems to look relatively unscathed, posting neutral or even positive returns over the trading days after the initial attack by Russia. As an investor, however, it is difficult to ignore the flurry of news dominating screens across the world. For those investors seeking a measure of assurance amid uncertainty, today we use Morningstar CPMS to look for profitable, low-volatility stocks. To create this strategy, I started with ranking the 707 stocks in our Canadian database on the following metrics:

  • Five- and 10-year standard deviation of earnings and return on equity (a statistical measure of volatility, applied in this case to bottom-line earnings and profitability over the past five and 10 years – lower figures preferred);
  • Five-year standard deviation of total returns (similar to above, but measuring the movement in a stock’s price);
  • Five-year price beta (recall that beta measures the historical sensitivity of a stock relative to an index. A stock with a beta of one has historically moved in tandem with an index in trending markets. Here we prefer stocks with lower betas);
  • Forward return on equity (using the current year’s median estimate on earnings and dividing by the adjusted book value per share).

An additional screen was put in place to remove companies with a market capitalization of less than $170-million, a figure meant to exclude the bottom one-third of the universe by size. To qualify, companies must have met or exceeded their latest expected earnings estimate from the Street, as measured by earnings surprise.

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

Profitable TSX-listed stocks with a history of lower volatility

RankCompanyTickerMkt. Cap. ($ Mil.)5Y EPS Dev. (%)10Y EPS Dev. (%)5Y ROE Dev. (%)10Y ROE Dev. (%)5Y Dev. of Ttl. Rtn. (%)5Y BetaFwd. ROE (%)Latest Earns. Surprise (%)Div. Yld. (%)12M Ttl. Rtn. (%)Recent Close ($)
1Firm Capital Mortg.FC-T471.
2Waste ConnectionsWCN-T41,
3Great-West LifecoGWO-T34,744.
4George Weston Ltd.WN-T20,
5BCE Inc.BCE-T60,948.
6TMX Group Ltd.X-T7,
7Metro Inc.MRU-T15,907.
9Loblaw Cos. Ltd.L-T32,692.
10Cdn. Utilities Ltd.CU-T9,545.
11TC Energy Corp.TRP-T66,835.
12Cdn. Nat'l RailwayCNR-T106,
13Open Text Corp.OTEX-T14,766.
14Atco Ltd.ACO-X-T4,757.
15Cogeco Comm.CCA-T3,

Source: Morningstar CPMS; data as of March 1

I used Morningstar CPMS to back-test the strategy from January, 2004, to January, 2022, assuming an equally weighted 15 stock portfolio with no more than three stocks for every economic sector. Once a month, stocks were sold if they fell below the top 25 per cent of the index based on the above metrics, if forward ROE turned negative or if the company missed earnings expectations by more than 5 per cent. When sold, stocks were replaced with next qualifying stock not already held in the portfolio, considering the aforementioned sector limits.

On this basis, the strategy produced an annualized total return of 11.1 per cent, while the S&P/TSX Composite Total Return Index advanced 8.1 per cent. Over this 18-year time frame, there were 78 months where the index posted negative returns. Of these months, the strategy outperformed the index 78 per cent of the time (61 of 78 months) – noteworthy given the defensive nature of this strategy. The stocks that meet requirements to be purchased into the strategy today are listed in the accompanying table.

This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

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

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