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What are we looking for?

TSX stocks that share similar characteristics with last year’s top performers.

The screen

Canadian equity investors had a banner year in 2021, given that the S&P/TSX Composite Total Return Index produced a whopping 25.1 per cent over the calendar year, rewarding patient index investors handsomely. To understand what fundamentals drove the market last year, I ran an analysis of the top 50 best performing stocks in the index.

Effectively a time machine, the analysis took an equally weighted portfolio of these best performers of 2021 and compared its fundamental characteristics with those of an equally weighted portfolio of stocks in the index using data from December, 2020.

What was clear from the analysis is stocks that did well last year had, on average, lower valuation ratios and higher estimate revisions than the broader market going into 2021. Using some of these key metrics, I used Morningstar CPMS to create a strategy that picks stocks with similar characteristics going into 2022. For starters, I ranked the 240 companies in the index on the following metrics:

  • Price-to-book, price-to-sales, price-to-cash-flow and enterprise-value-to-EBITDA (earnings before interest, taxes, depreciation and amortization). Each of these is a core value metric where a lower value is better;
  • Three-month revision of earnings per share estimates (compares today’s median Street estimate for EPS with the median estimate at month-end three months ago). In other words, this measures Street analysts’ short-term sentiment on a stock, higher values preferred;
  • Estimated annual EPS growth rate (a measure of expected year-over-year EPS growth. It is calculated as the median EPS estimate for a company’s current fiscal year as a percentage change from the median EPS estimate from the previous fiscal year).

Only stocks in the S&P/TSX Composite were considered (today this includes 240 companies).

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

15 TSX stocks similar to last year’s top performers

RankCompanyTickerMkt. Cap. ($ Mil.)P/BookP/SalesP/CFEV/EBITDA3M EPS Estim. Rev. (%)Estim. EPS Grth. Rate (%)Div. Yld. (%)12M Ttl. Rtn. (%)Recent Close ($)
1Vermilion EnergyVET-T2,601.71.51.63.65.7115.290.21.5182.216.03
2Parkland Corp.PKI-T5,395.52.90.34.87.725.338.03.5-9.535.39
3Cascades Inc.CAS-T1,413.00.80.33.76.8-12.7287.23.40.614.01
4Suncor Energy Inc.SU-T48,301.41.41.46.06.717.348.45.159.933.15
5Hudbay MineralsHBM-T2,447.91.31.44.76.0-7.3312.50.2-0.59.36
6Teck Resources Ltd.TECK-B-T19,781.70.91.74.76.116.6-2.80.553.837.1
7Martinrea Int'l Inc.MRE-T929.80.80.22.95.0-29.7194.31.7-20.311.57
8Primo Water Corp. PRMW-T3,586.22.21.410.411.530.628.61.48.622.4
9Canaccord GenuityCF-T1,636.91.60.82.91.07.6-10.41.941.315.47
10Celestica Inc.CLS-T1,580.01.00.35.34.80.020.2n/a47.414.89
11Corus EntertainmentCJR-B-T992.01.00.73.12.5-1.71.25.019.24.84
12Russel Metals Inc.RUS-T2,093.91.80.64.63.930.9-55.64.653.233.25
13Maple Leaf FoodsMFI-T3,627.41.80.810.610.77.727.62.56.229.25
14Manulife FinancialMFC-T48,367.61.00.82.27.4-0.19.35.316.224.9
15Superior Plus Corp.SPB-T2,298.62.41.27.611.7-4.7118.95.513.113.06

Source: Morningstar CPMS; data as of Jan. 4

I used Morningstar CPMS to back-test the strategy from November, 2001, to November, 2021, assuming an equally weighted 15-stock portfolio with no more than three stocks for each economic sector. Once a month, stocks were sold if they fell below the top 35 per cent of the index based on the above metrics. When sold, stocks were replaced with next qualifying stock not already held in the portfolio, considering the aforementioned sector limits.

On this basis, the strategy produced an annualized total return of 11 per cent, while the S&P/TSX Composite Total Return Index advanced 8.1 per cent. On a trailing 12-month basis ended November, 2021, the strategy produced 39.8 per cent, while the index gained 23.5 per cent.

The stocks that meet requirements to be purchased into the strategy today are listed in the table. This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

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

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