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What are we looking for?

Companies that have reported in the past 30 days, and didn’t see the sky fall.

The screen

For most Canadians, the countrywide shelter-at-home order started a bit more than 10 weeks ago, bringing with it an eerie silence on our streets and a grinding halt to much of the economy. As COVID-19 restrictions start to ease, it is likely that the effects of lockdown have yet to fully hit the income statements of Canadian companies. Nevertheless, over the past 30 days roughly 550 of the 700 Canadian companies in the Morningstar CPMS database have reported their first quarter earnings, which included the first weeks of the shutdown. Of these companies, about 230 of them have reported a drop in earnings of more than 10 per cent compared with the same quarter last year. Many of these reports were in the energy and basic materials sectors (64 and 52 companies, respectively).

Today, I look for companies that have had a consistent history of earnings, and have managed to report growth in the first quarter despite the pandemic’s influence. To find these companies I ranked the 700 companies in the Morningstar CPMS Canadian database on:

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  • Five-year deviation of reported earnings (a measure of consistency, lower figures preferred);
  • Latest reported return on equity;
  • Variation of current year estimates of earnings per share (a measure that gauges how consistent the opinions of Street analysts are for the company’s future earnings, lower figures preferred);

To qualify, companies much have a market cap greater than $90-million (meant to exclude the bottom one-third of stocks in Canada by size). Additionally, stocks must have an annual and quarterly earnings momentum that is greater than or equal to zero. This measures the latest four quarters of reported earnings compared against the same figure four quarters and one quarter ago, respectively. Finally, only companies that have reported in the past 30 days were considered and companies that missed earnings expectations were excluded.

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 June, 1998, to April, 2020, using a maximum of 15 stocks with no more than three for each economic sector. Once a month stocks were sold if they dropped below the top 35 per cent of the universe of 700 companies based on the factors listed above, or if earnings momentum turned negative. When sold, the stocks were replaced with the highest ranking stock not already held in the portfolio, respecting the aforementioned sector limits. Over this period the strategy produced an annualized total return of 11.7 per cent while the Morningstar Canada Gross Return Index advanced 7 per cent over the same time frame. On a one-year trailing basis ended April, 2020, the strategy lost 6.1 per cent while the index lost 8.3 per cent. The stocks that meet the requirements to be purchased into the model today are listed in the table below.

Select TSX-listed companies

RankCompanySymbolMorningstar SectorMkt. Cap. ($ Mil.)Ann. Earns. Moment. (%)Qtly. Earns. Moment. (%)5Y EPS Dev. (%)Trailing ROE (%)Var. in EPS Estim. (%)Div. Yld. (%)Recent Price ($)Ttl. Rtn. from Month End, 12M Ago (%)
1CI Financial Corp.CIX-TFin'l Services3,635.84.22.74.337.62.74.416.36-15.8
2Cdn. National RailwayCNR-TIndustrials83,756.83.40.93.122.81.22.0117.780.1
3CGI Inc.GIB-A-TTechnology20,124.29.82.12.819.54.10.087.44-11.2
4BCE Inc.BCE-TComm. Services50,389.11.10.91.618.35.26.055.72-3.2
5Constellation SoftwareCSU-TTechnology33,924.612.06.44.0100.417.30.31,600.8637.2
6TMX Group LimitedX-TFin'l Services7,500.46.24.33.59.02.72.0133.0949.8
7First National Fin'lFN-TFin'l Services1,782.824.05.915.443.35.76.629.734.9
8TC Energy Corp.TRP-TEnergy56,693.87.32.75.214.83.85.460.32-3.8
9CCL Industries Inc.CCL-B-TCons. Cyclical8,090.02.50.06.417.74.01.645.29-25.3
10George Weston Ltd.WN-TCons. Defensive14,864.38.72.83.317.66.62.296.73-2.1
11Calian Group Ltd.CGY-TIndustrials503.123.76.76.918.03.72.152.2158.0
12Colliers Int'l GroupCIGI-TReal Estate2,728.314.30.88.338.910.30.270.83-14.8
13Stella-Jones Inc.SJ-TBasic Materials2,277.015.03.79.212.72.11.833.75-24.2
14Labrador Iron OreLIF-TBasic Materials1,382.454.43.823.238.211.44.621.60-21.0
15Northland Power Inc.NPI-TUtilities5,902.261.617.119.938.717.43.930.4526.4

Source: Morningstar CPMS.

Data as of May 26.

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

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