What are we looking for?
Relative-value ideas among TSX-listed stocks.
Year-to-date, the S&P/TSX Composite Index is down roughly 4.3 per cent on a total-return basis, giving back the substantial gains seen from April to July. With this recent market correction, today’s strategy looks to help investors who are on the hunt for some value-oriented names. To find companies that appear reasonably valued relative to all others, I use Morningstar CPMS to rank the largest 250 companies in Canada by market capitalization on the following factors:
- Price to trailing earnings, price to sales, price to book, price to free cash flow (in all cases lower figures preferred);
- 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);
- Five-year deviation of earnings a share (a statistical measure showing how volatile a company’s earnings have been over the past five years, lower figures preferred).
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 September, 2004, to October, 2018. During this process, a maximum of 20 stocks were purchased and equally weighted with a maximum of four stocks in an economic sector. Once a month, stocks were sold if their rank fell below the top 35 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 12.3 per cent while the S&P/TSX Composite Total Return Index gained 6.9 per cent. In the trailing 12 months, the strategy lost 8.3 per cent while the index declined 3.4 per cent. The stocks that meet my requirements are listed in the accompanying 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.