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number cruncher

What are we looking for?

Canadian companies sharing characteristics of winners in 2018.

The screen

It’s been a tough go for indexers in Canada this year. Of course, there is a plethora of benefits in owning a low-cost, index exchange-traded fund and staying invested for the long-term, but this is one of those years that might leave some investors scratching their heads.

Today, I focus on companies that have exceeded a 5-per-cent price return year to date and compared the characteristics of these companies against the market. Of the 700 companies covered in the Morningstar CPMS Canadian database, 133 showed a price return of 5 per cent or more so far this year. These companies also shared the following characteristics (which determined my model’s rankings):

  • Five-year growth of dividends, sales, earnings a share and cash flow (on average, how much each of these has grown a year over the past five years);
  • Five-year average return on equity;
  • Five-year historical beta (recall beta measures the historical sensitivity of a stock to an index. Companies with lower beta have moved less than the market when markets are falling or rising – here we prefer lower figures);
  • Latest reported return on total assets;
  • Price change from month-end six and nine months ago (not shown).

In my model, companies must have at least 700,000 shares traded in the past month (this removes the bottom one-third of stocks by liquidity from our universe). Note: While the 5-per-cent year-to-date return is my starting point, unlike the criteria above, it is not an explicit filter.

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 April, 1995, to November, 2018. During this process, a maximum of 20 stocks were purchased and equally weighted with no more than four for each economic sector. Once a month, stocks were sold if their rank fell below the top 25 per cent of the ranked universe. 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 15.1 per cent while the S&P/TSX Composite Total Return Index gained 8 per cent. There were 31 quarters where the index showed negative returns; of these quarters this strategy beat the benchmark 90 per cent of the time (28 of 31 quarters).

The stocks that meet my requirements are listed in the table below. It is always recommended to speak to a financial adviser or investment professional before investing.

Select TSX-listed Canadian stocks

Rank Company Ticker Market Cap ($Mil) Div. Yield (%) 5 Yr Beta 5 Yr Div. Growth (%/Yr) 5 Yr EPS Growth (%/Yr) 5 Yr CF Growth (%/Yr) 5 Yr Sales Growth (%/Yr) 5 Yr Avg. ROE (%)
1 Couche-Tard ATD-B-T 38,745.7 0.6 -0.5 36.2 23.3 24.6 13.5 22.9
2 Gildan Activewear GIL-T 8,813.3 1.4 0.3 25.5 14.6 16.4 13.7 17.6
3 Quebecor QBR-B-T 7,566.6 0.8 0.2 31.5 20.6 6.1 1.1 53.3
4 MTY Food Group MTY-T 1,579.9 1.0 0.5 14.3 17.7 27.6 28.7 17.7
5 Waste Connections WCN-T 27,238.4 0.8 0.3 23.9 28.4 25.1 23.2 10.1
6 CPR CP-T 36,553.1 1.0 1.1 15.2 13.2 8.4 6.2 27.3
7 Metro MRU-T 12,018.3 1.5 0.0 18.1 11.2 12.0 8.9 18.6
8 Cargojet CJT-T 1,005.3 1.1 1.2 7.6 34.0 69.3 10.3 6.8
9 Algonquin Power AQN-T 6,814.8 4.7 0.4 16.7 31.0 15.8 7.2 8.1
10 TFI International TFII-T 3,597.7 2.3 1.1 9.4 20.4 19.0 12.2 15.0
11 Rogers Comms. RCI-B-T 36,227.4 2.7 0.3 2.0 4.3 4.1 3.3 29.6
12 Morguard REIT MRG-UN-T 608.9 3.8 0.5 1.9 24.7 14.3 7.6 1.4
13 Parkland Fuel PKI-T 4,899.7 3.2 0.2 2.8 3.0 7.1 2.4 11.8
14 Medical Facilities DR-T 482.9 7.2 0.6 0.0 16.2 4.2 14.6 11.7
15 Absolute Software ABT-T 337.7 3.8 0.8 10.6 -44.6 -1.6 8.7 751.0
16 Fortis FTS-T 19,907.7 3.9 0.0 7.6 12.3 9.6 -1.8 7.5
17 InterRent REIT IIP-UN-T 1,421.2 2.2 0.2 7.3 6.3 -6.3 5.2 5.8

Source: Morningstar CPMS

*While some companies do not show a YTD return of 5% or more, they exhibit the same core fundamental metrics as those that did.

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