Skip to main content

What are we looking for

Slow and steady stocks in the S&P 500.

The screen

As investors continue to keep a keen eye on the trade war, many are likely somewhat relieved that the Federal Reserve will react appropriately and may consider cutting rates in reaction to the escalating trade war. Either way, investors who are bracing for an equity correction may consider this week’s idea that looks for S&P 500 companies showing a good combination of the following medium/long-term historical fundamental measures.

  • Five year historical beta, which is a measure showing historically how sensitive the stock price is to the S&P 500. In trending markets, stocks that have low betas have moved less than the index. Here, we prefer lower figures;
  • 10 year average return on equity (ROE);
  • 10 year earnings-per-share growth rate;
  • 10 year deviation of ROE and EPS (a statistical measure of how volatile a company’s ROE or earnings have been, lower figures preferred);

To qualify, stocks must pay a dividend yield of 2.4 per cent or higher (a figure representing the median yield in the S&P 500 today). Additionally, stocks must pay out less than 80 per cent on expected earnings or 60 per cent on operating cash flows to be considered to ensure dividends are reasonably sustainable.

Story continues below advertisement

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 120 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 February, 2006, to April, 2019. During this process, a maximum of 15 stocks were purchased and equally weighted with no more than four in each economic sector. Once a month, stocks were sold if their rank fell below the top 30 per cent of the S&P 500 based on the above factors. 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 return of 9.8 per cent while the S&P 500 returned 8.8 per cent. There were 50 months, 14 quarters and two calendar years over this time period when the S&P 500 showed a negative return. Of these months/quarters/years, our model outperformed the market 82 per cent, 85 per cent and 100 per cent of the time, respectively, outlining the defensive nature of this strategy.

The stocks that qualify for purchase today and are listed in the table below. It is always recommended to speak to a financial adviser or investment professional before investing.

Select U.S. stocks with strong fundamentals

RankCompanySymbolMarket Cap ($USMIL)5Y Historical Beta10Y Avg ROE (%)10Y Deviation of ROE 10Y EPS Growth (%/year)10Y Deviation of EPSDiv. Yield (%)Payout on Forward EPS (%)Payout on Operating Cash flows (%)Recent Close ($USD/Share)
1Xcel Energy Inc.XEL-Q29,737.80.210.30.45.52.52.862.124.557.78
2Consolidated Edison Inc.ED-N28,631.20.19.00.43.13.33.468.028.687.53
3Southern CompanySO-N56,384.00.212.80.63.43.84.681.645.554.20
4American Electric PowerAEP-N42,953.60.110.50.53.34.53.165.027.087.05
5J.M. Smucker CompanySJM-N14,172.80.510.60.65.53.72.740.534.3124.60
6Procter & Gamble Co.PG-N262,568.80.417.71.21.03.82.963.051.4104.68
7C.H. Robinson WorldwideCHRW-Q10,957.80.637.85.07.78.42.540.331.480.24
8Paychex Inc.PAYX-Q30,677.80.938.23.47.96.42.980.055.585.36
9AT&T Inc.T-N229,741.00.513.81.15.06.56.557.024.231.48
10Johnson & JohnsonJNJ-N355,060.60.725.23.56.55.42.844.144.4133.73
11T. Rowe Price Group Inc.TROW-Q24,321.51.123.43.316.58.03.039.545.8102.85
12Cisco Systems IncCSCO-Q227,863.41.220.52.57.23.72.641.038.453.23
13Snap-On Inc.SNA-N8,853.61.318.12.920.26.02.430.921.9159.80
14Packaging Corp. of AmericaPKG-N8,844.61.824.46.745.514.73.438.623.293.60
15Foot Locker Inc.FL-N4,607.01.016.76.325.912.93.730.126.041.02

Source: Morningstar Canada

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

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter
To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies