Skip to main content
number cruncher

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.

Sector outperformers

RankCompanyTickerMorningstar Sector3M Price Chg. Rel. to Sector Median (%)9M Price Chg. Rel. to Sector Median (%)Price to BookPrice to Fwd Earns Fwd ROE (%)Qtrly Earns Momentum (%)Recent Close ($)Div. Yield (%)
1Labrador Iron OreLIF-TBasic Materials29.343.13.98.943.612.933.133.0
2Kirkland Lake Gold Ltd.KL-TBasic Materials21.670.65.717.033.717.645.920.3
3Magna International Inc. MG-TCons. Cyclical4.
4Martinrea International Inc.MRE-TCons. Cyclical18.
5Parex Resources Inc.PXT-TEnergy16.
6Great Canadian Gaming Corp.GC-TCons. Cyclical8.229.06.918.038.410.955.770.0
7Constellation SoftwareCSU-TTechnology15.16.521.
8Badger Daylighting Ltd.BAD-TIndustrials7.419.
9TransCanada Corp.TRP-TEnergy10.528.
10Ero Copper Corp.ERO-TBasic Materials65.678.811.919.361.550.016.970.0
11Royal Bank of CanadaRY-TFin. Services0.
12Alimentation Couche-TardATD-B-TCons. Defensive6.537.53.916.723.42.976.150.5
13Toromont Industries Ltd.TIH-TIndustrials13.517.
14Home Capital GroupHCG-TFin. Services4.
15Empire Company Ltd.EMP-A-TCons. Defensive0.

Morningstar CPMS

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

Report an editorial error

Report a technical issue

Editorial code of conduct

Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 13/06/24 3:12pm EDT.

SymbolName% changeLast
Labrador Iron Ore Royalty Corp
Magna International Inc
Martinrea International Inc
Parex Resources Inc
Constellation Software Inc
TC Energy Corp
Ero Copper Corp
Royal Bank of Canada
Toromont Ind
Empire Company Ltd

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe