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What are we looking for?

A portfolio of Canadian GARP-style stocks.

The screen

Growth-at-a-reasonable-price (GARP) investing is a blend of two popular investment styles: growth and value. A GARP strategy will search for stocks that have characteristics of both styles, resulting in a portfolio that has growth-oriented stocks trading at a low valuation. To be clear, this style does not simply mix value stocks with growth stocks (for example, 10 growth and 10 value stocks), but instead looks for stocks that demonstrate both styles of investing.

Today I’m showcasing a strategy that searches for GARP stocks, within the current CPMS Canadian universe of 697 stocks, by using a blend of value and growth factors. The strategy ranks stocks based on trailing price-to-earnings (a value metric, low values preferred), price-to-book-value (a value metric, low values preferred), quarterly earnings momentum (measured as the growth in the most recent four quarters of earnings relative to the same four quarters' earnings lagged by one quarter – higher value is best), and the PEG ratio (measured as the P/E ratio divided by expected earnings-a-share growth; low values preferred).

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Stocks that qualify must have:

  • Trailing P/E in the lowest two-thirds of peers (today this value is 27.4 or less);
  • Forward P/E in the lowest two-thirds of peers (today this value is 24.4 or less);
  • Quarterly earnings momentum greater than zero;
  • Return on equity (a growth metric) greater than or equal to 3 per cent;
  • Current-year EPS growth (measured as the change in this year’s estimated EPS over last year’s reported EPS) greater than zero;
  • Last-year EPS growth (measured as the change in last year’s reported EPS over reported EPS from two years ago) greater than zero.

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 110 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 December, 1991, to July, 2018. During this process, a maximum of 15 stocks were purchased. Stocks were sold if their quarterly earnings momentum fell below minus 12 per cent. 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 total return of 15.2 per cent while the S&P/TSX Composite Total Return Index returned 8.6 per cent across the same period. Stocks that qualify for purchase into the strategy today are listed in the accompanying table.

As always, investors are advised to do further research before purchasing any of the investments listed here.

TSX-listed stocks showing growth at a reasonable price 

Rank Company Symbol Recent Price ($) Mkt. Cap. ($ Mil.) Div. Yield (%) Trailing P/E Fwd. P/E P/B ROE (%) Qtly. Earns. Momentum (%) Curr. Yr. EPS Growth (%) Last Yr. EPS Growth (%) PEG
1 Uranium Participation U-T 4.65 642.0 0.0 10.8 2.9 1.2 42.5 243.3 633.3 83.2 0.0
2 TransGlobe Energy Corp. TGL-T 4.51 325.6 2.0 13.2 6.1 1.2 19.7 110.7 338.8 105.5 0.0
3 Source Energy Services SHLE-T 4.88 300.4 0.0 14.4 7.9 1.0 12.5 149.3 347.9 84.8 0.0
4 Trevali Mining Corp. TV-T 0.71 589.7 0.0 4.7 3.6 0.6 16.3 14.7 43.8 32.8 0.1
5 Husky Energy Inc. HSE-T 21.23 21,338.7 2.4 19.3 12.3 1.2 9.6 65.9 255.3 164.1 0.0
6 Conifex Timber Inc. CFF-T 5.02 233.7 0.0 4.9 6.1 0.6 10.1 19.7 22.5 166.4 0.3
7 West Fraser Timber Co. WFT-T 90.77 6,708.1 0.7 7.2 6.5 2.2 34.4 30.4 65.4 106.1 0.1
8 Cdn. Natural Resources CNQ-T 45.13 55,107.0 3.0 18.7 12.2 1.7 14.0 46.1 212.1 293.5 0.1
9 Gran Tierra Energy Inc. GTE-T 4.18 1,656.7 0.0 16.6 9.8 1.3 13.0 39.2 152.5 120.4 0.1
10 Polaris Infrastructure PIF-T 11.94 187.2 6.6 23.5 11.0 0.8 7.0 31.5 306.2 29.0 0.0
11 Canfor Pulp Products CFX-T 27.94 1,823.1 0.9 9.7 8.1 2.6 32.9 29.7 118.2 69.8 0.1
12 Storm Resources Ltd. SRX-T 3.01 365.9 0.0 10.2 9.7 1.0 10.1 42.4 74.9 103.0 0.1
13 Canfor Corp. CFP-T 31.36 4,033.7 0.0 7.3 7.1 2.0 27.7 25.7 60.8 150.6 0.1
14 Seven Generations Engy. VII-T 15.27 5,523.0 0.0 10.9 8.5 1.2 14.5 28.0 91.0 52.2 0.1
15 N. Amer. Construction NOA-T 9.78 266.8 0.8 20.3 17.5 1.8 10.1 86.9 205.0 92.9 0.1

Source: Morningstar Canada

Emily Halverson-Duncan, CFA, is a director, CPMS sales at Morningstar Research Inc.

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