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number cruncher

What are we looking for?

U.S.-listed stocks favoured by analysts that are growing faster than their sector peers.

The screen

This week, we look to the opinion of sell-side analysts – those whose profession it is to predict future earnings based on their in-depth knowledge of a company and industry. As investors are aware, not only do these estimates for a particular company vary, they are regularly revised as circumstances change. However, when viewed on aggregate and isolated for directionality, estimate revisions can offer investors a good indication of sentiment on a stock. With this in mind, today I use Morningstar CPMS to look for analyst favourites that have also grown faster than peers in the same sector, in terms of earnings and sales. To do this, I start by ranking the 2,038 stocks in the CPMS U.S. database on the following metrics:

  • Three-month estimate revisions of earnings per share (calculated as the current median estimate from analysts compared with the same figure three months ago);
  • Sector-relative five-year EPS and sales growth rates (on average, how much earnings and sales have grown each year in the past five);
  • Sector-relative quarterly earnings momentum (the past four quarters of reported earnings compared with the same figure one quarter ago);
  • Sector-relative forward return on equity (here we use analyst estimates of earnings for the upcoming fiscal year to calculate return on equity).

In the table, positive sector-relative figures indicate that the company’s growth rates have been higher than the median of the sector to which it belongs. (An energy company, for example, with a sector-related five-year EPS growth rate of 37.6 per cent indicates earnings have grown, on average, 37.6 per cent more a year than the median company in the U.S. energy sector.)

Only companies with a market capitalization greater than US$1.7-billion were considered. This figure is meant to exclude the bottom one-third of stocks in the database by size.

What we found

I used Morningstar CPMS to back-test this strategy from December, 1993, to April, 2021, using a maximum of 15 stocks with no more than four an economic sector. Once a month, stocks were sold if they fell below the top 35 per cent of the index based on the aforementioned metrics and replaced with the highest-ranking stock not already held in the portfolio. On this basis, the strategy produced an annualized total return of 13.2 per cent, while the S&P 500 Total Return Index produced 10.5 per cent.

The stocks that meet the requirements to be purchased today are listed in the accompanying table. This article does not constitute financial advice. It is always recommended to speak with a financial adviser or professional before investing.

Select U.S.-listed stocks 

RankCompanyTickerMorningstar SectorMkt. Cap. (US$ Mil.)3M EPS Estim. Rev. (%)Sector Rel. 5Y EPS Grth. Rate (%)Sector Rel. 5Y Sales Grth. Rate (%)Sector Rel. Qtly. Earns. Mom. (%)Sector Rel. ROE (%)Div. Yld. (%)12M Ttl. Rtn. (%)Recent Close (US$)
1Matador ResourcesMTDR-NEnergy3,432.265.037.624.488.418.00.3251.329.39
3Crocs Inc.CROX-QCons. Cyclical6,639.846.032.72.727.875.20.0289.6101.79
4EOG ResourcesEOG-NEnergy48,421.761.338.314.866.
5Cheniere EnergyLNG-AEnergy21,221.132.911.263.4103.8617.50.092.383.70
6Cimarex EnergyXEC-NEnergy7,456.443.98.77.689.344.01.5173.372.52
7Steel DynamicsSTLD-QBasic Materials13,368.1110.89.86.331.624.41.6164.063.29
8Pool Corp.POOL-QCons. Cyclical17,
9Nucor Corp.NUE-NBasic Materials30,962.6150.910.14.737.715.31.6157.2103.47
10SLM Corp.SLM-QFin'l Services6,205.335.419.223.317.528.20.6160.719.69
11SVB FinancialSIVB-QFin'l Services31,256.237.330.821.622.65.80.0207.0575.46
12Lam ResearchLRCX-QTechnology83,408.
13Southern CopperSCCO-NBasic Materials59,186.534.811.35.322.329.33.7121.076.56
14LGI Homes Inc.LGIH-QCons.Cyclical4,152.329.
15Williams-SonomaWSM-NCons. Cyclical12,819.830.021.15.513.725.51.4145.3170.29

Source: Morningstar CPMS. Data as of May 18

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.

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

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