What are we looking for?
Canadian-listed stocks that have beat earnings expectations and are favoured by analysts.
All of Canada’s largest banks recently reported earnings that have exceeded analyst estimates. The Big Six together make up about 21.5 per cent of the S&P/TSX Composite Index and, suffice to say, have helped drive market returns. This may lead investors to wonder what other companies have done the same. To this end, I use Morningstar CPMS to look for companies that not only exceeded analyst expectations in the latest earnings report, but also compelled analysts to revise their estimates upward. To do this, I start by ranking the 705 companies in our Canadian database on the following factors:
- Quarterly earnings surprise (a comparison of the company’s latest earnings against the median consensus estimate just prior to report);
- Three-month estimate revisions to earnings per share (this is calculated as the current median estimate from analysts compared with the same figure three months ago);
- Projected EPS growth rate (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);
- One-month price momentum (calculated as the average price over the past three months as a percentage change from the average price over the three-month period ended one month ago);
- Five-year average return on equity.
Only companies with a market cap greater than $1.4-billion were considered. This figure is meant to exclude the bottom two-thirds of stocks in the database by size. Additionally, only companies that have reported within the past 30 days and with at least three active estimates were considered.
What we found
I used Morningstar CPMS to back-test this strategy from May, 2002, to April, 2021, using a maximum of 15 stocks with no more than four per economic sector. Once a month, stocks were sold if they fell below the top 35 per cent of the index based on the aforementioned metrics and replaced with the highest ranking stock not already held in the portfolio. On this basis, the strategy produced an annualized total return of 13.9 per cent, while the S&P/TSX Composite Total Return Index advanced 7.9 per cent.
The stocks that meet the requirements to be purchased today are listed in the accompanying table. Note that although I didn’t explicitly exclude banks in my ranking and screening process, other companies ended up ranking higher on metrics such as earnings surprise and estimate revisions. Hence none of the Big Six appear on my buy list today.
This article does not constitute financial advice. It is always recommended to speak with a financial adviser or professional before investing.
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.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.