Skip to main content
Complete Olympic Games coverage at your fingertips
Your inside track on the Olympic Games
Enjoy unlimited digital access
$1.99
per week for 24 weeks
Complete Olympic Games coverage at your fingertips
Your inside track onthe Olympics Games
$1.99
per week
for 24 weeks
// //

What are we looking for?

Companies that are financially healthy and reinvesting their earnings for future growth.

The screen

As the stock market continues to reach new highs, it might be a good time for investors capitalizing on momentum to harvest at least some of those gains and move into “safer” stocks. This can enhance the downside protection in your portfolio by reducing solvency and liquidity risks. Morningstar has created a factor based on a quantitative health score to make it easier to determine whether a company is in good financial health. The methodology ranks companies on the likelihood that they will tumble into financial distress by using measures of leverage to estimate a firm’s “distance to default.”

Today I use Morningstar CPMS to look for Canadian companies that have a strong financial health score and the ability to reinvest their earnings. The reinvestment rate, based on the trailing earnings per share, is a good metric to find companies that are looking to grow their business, which can lead to stronger investment returns. This is calculated as EPS minus dividends divided by adjusted book value. I also factored in the return on equity (operating EPS as a percentage of the company’s average shareholders’ equity per share over the past year) because it is a good measure of financial performance. Lastly, I incorporated the standard deviation of a stock to reduce the price volatility in the portfolio and enhance risk adjusted returns. A larger standard deviation implies more volatility.

Story continues below advertisement

The investment process started off with all 700 Canadian stocks in our CPMS database. Then we ranked those stocks according to the Morningstar quantitative financial health score, trailing reinvestment rate, return on equity and the 180-day standard deviation.

Next, we applied four screens to those 700 stocks to create our list:

  • Morningstar Quantitative Health Score in the top third (greater than 0.67);
  • Reinvestment rate in the top third (greater than 5.2);
  • Return on equity above 10 per cent;
  • 180-day standard deviation below the median (less than 47).

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.

What we found

Financially healthy TSX stocks

RankCompanyTickerMkt. Cap. ($ Mil.)Morningstar Quant. Fin'l Health ScoreReinv. Rate (%)ROE (%)180D Stand. Dev.Div. Yld. (%)12M Price Chg. (%)Recent Price ($)
1First National Fin'lFN-T 2,912.0 0.94 25.1 53.5 20.9 4.8 72.0 48.56
2Yellow Pages Ltd.Y-T 400.6 0.82 92.0 200.7 21.6 4.2 60.2 14.42
3Chesswood GroupCHW-T 235.0 0.89 22.2 24.1 25.2 2.7 231.8 13.14
4Constellation Sftwre.CSU-T 39,159.6 0.73 102.4 97.2 25.5 0.3 20.5 1,847.89
5Canaccord GenuityCF-T 1,439.1 0.88 22.8 29.7 35.9 2.2 93.5 13.37
6CIBCCM-T 64,988.3 0.97 7.9 15.0 10.7 4.0 59.5 144.71
7Dollarama Inc.DOL-T 17,343.9 0.70 420.8 380.7 19.7 0.4 23.8 55.90
8Interfor Corp.IFP-T 1,950.1 0.73 48.3 57.1 42.3 n/a 161.0 29.86
9Fairfax FinancialFFH-T 13,675.8 0.92 15.4 17.5 21.3 2.2 29.1 541.66
10Absolute SoftwareABST-T 871.9 0.73 33.0 187.5 45.4 1.8 27.5 17.61

Source: Morningstar CPMS

I used CPMS to back-test the strategy from January, 2012, to May, 2021. During this process, a maximum of 10 stocks were purchased and equally weighted. The portfolio is rebalanced monthly and the strategy produced a total return of 18.8 per cent since inception whereas the S&P/TSX Composite Total Return Index generated 8.3 per cent.

Today, the top 10 stocks that qualify for purchase into the strategy are listed in the accompanying table. Readers should note that four small cap names are included, which may come with their own risks, such as illiquidity.

As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Phil Dabo, MFin, is a vice-president of business development at Morningstar Research Inc.

Story continues below advertisement

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.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies