What are we looking for?
Canadian stocks performing better than their respective sectors.
The screen
As we head into March, the domestic equity market seems to have recovered nicely (and quickly) from the lows of 2018. Case in point, if you had $100 invested in a fund tracking the S&P/TSX Composite Total Return Index at the start of 2018, that $100 would be worth $102 today, despite dipping down to just $91 at the end of 2018. This said, if you feel that domestic equities will continue to grow, this week’s strategy, which looks for sector outperformers, may offer some ideas. To find said companies, I used Morningstar CPMS to rank the largest 200 companies in Canada by market capitalization on the following metrics:
- Three-, six-, and nine-month price changes relative to the company’s sector median price change (in the table, a figure of 4.2 per cent would imply that the company outperformed its sector median by 4.2 percentage points over the given time frame – higher figures preferred, six-month figure not shown);
- Price-to-book ratio and price-to-forward-earnings ratio (both are value metrics, lower figures preferred);
- Forward return on equity;
- Quarterly earnings momentum (the past four quarters of operating earnings compared with the same figure one quarter ago);
- Five-year earnings-per-share deviation (a statistical measure showing how volatile a company’s earnings have been, not shown).
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 May, 1992, to January, 2019. During this process, a maximum of 15 stocks were purchased and equally weighted with no more than three in each economic sector. Once a month, stocks were sold if their rank fell below the top 35 per cent of the ranked universe, if return on equity turned negative, or if quarterly earnings momentum dropped by more than 10 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 15.4 per cent while the S&P/TSX Composite Total Return Index gained 8.5 per cent.
The stocks that qualify for purchase today are listed in the accompanying table. It is always recommended to speak to a financial adviser or investment professional before investing.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.
Ian Tam, CFA