What are we looking for:
Canadian growth companies available at a reasonable price.
This week, I use Morningstar CPMS to look for Canadian companies for which analysts have projected upward growth in earnings for the coming and following fiscal years, but that are available at a reasonable price. Seasoned investors will recognize this quickly as a GARP (growth at a reasonable price) strategy. The strategy starts by taking the largest 250 Canadian companies (by market cap) and sorts them on the following factors:
- Five-year earnings-per-share deviation (a stability metric measuring how consistent earnings have been over the past five years, lower figures preferred);
- Three-month estimate revision (today’s median consensus estimate for EPS versus what it was three months ago, higher figures preferred);
- Current and next-year projected growth rate of earnings (based on median consensus estimates from the street, higher figures preferred);
- PEG ratios on growth rate and reinvestment rates (GARP measures comparing the forward P/E against the growth rate of earnings and reinvestment rate of the company, respectively).
To qualify, stocks must have met or beat the latest street expectation on earnings in the last reported quarter (not shown in table).
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 May, 2019. During this process, a maximum of 20 stocks were purchased and equally weighted with no more than five for each economic sector. Once a month, stocks were sold if their rank fell below the top 50 per cent of the universe, if the company missed earnings expectations by more than 5 per cent, or if street estimates fell by more than 5 per cent over three months. 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 return of 16.2 per cent while the S&P/TSX Composite Total Return Index returned 8.5 per cent.
The stocks that qualify for purchase today are listed in the 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.
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