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number cruncher

What are we looking for?

A year-end reading of analysts’ projections for earnings growth among TSX stocks.

The screen

With just a handful of trading days left in 2021, forward-thinking investors might already be planning ahead for the new year. Will the stocks that did well this year continue to rally next year? Time will tell, but Street analysts certainly have their own opinion. With this in mind, I use Morningstar CPMS to rank companies based on median analyst projections on the growth rate of earnings for the coming fiscal year and beyond. To do so, I used the following factors:

  • Next year’s earnings per share growth rate, based on the median estimate (this figure is calculated by taking the median projected EPS for fiscal year 2023 and comparing it against the median projected EPS for fiscal year 2022. In effect, this is the growth rate projected by Street analysts, two fiscal years out);
  • Change in the 2023 median EPS estimate over the past three months (here we look at the 2023 median estimate for earnings as it appears today and compare it with how it appeared at month end, three months ago). In effect, this is a sentiment indicator that investors should note can change quickly as market conditions change and new information is revealed);
  • Five-year average return on equity (note that ROE is a profitability metric, in this case measured on average over five years);
  • Five-year deviation of ROE (a measure of how volatile ROE has been over the past five years, lower figures preferred).

Only stocks in the S&P/TSX Composite Index were considered (today this includes 233 companies). Additionally, only companies with at least three active Street analyst estimates for 2023 were included in the search to ensure a reasonable median was able to be calculated.

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.

What we found

TSX-listed stocks

RankCompanyTickerMkt. Cap. ($ Mil.)Next Yr. Grth. Rate (%)3M Chg. in 2023 Estim. (%)5Y Avg. ROE (%)5Y Dev. of ROE (%)Div. Yld. (%)12M Ttl. Rtn. (%)Recent Close ($)
1Hudbay Minerals Inc.HBM-T2,272.763.
2CI Financial Corp.CIX-T5,208.512.712.535.82.92.762.926.38
3Maple Leaf Foods Inc.MFI-T3,587.736.312.
4Home Capital GroupHCG-T2,
5Suncor Energy Inc.SU-T43,959.34.466.
6Stantec Inc.STN-T7,838.616.113.811.91.20.972.170.5
7Thomson Reuters Corp.TRI-T73,740.838.
8Great-West Lifeco Inc.GWO-T35,246.811.62.713.
9Innergex Renew. EnergyINE-T3,441.418.
10MTY Food Group Inc.MTY-T1,418.611.911.313.
11Sun Life Financial Inc.SLF-T40,576.
12WSP Global Inc.WSP-T20,995.
13Cdn. National RailwayCNR-T114,159.314.01.522.82.01.517.5161.63
14FirstService Corp. FSV-T10,697.011.33.636.57.30.447.1243.51

Source: Morningstar CPMS; data as of Dec. 14

I used Morningstar CPMS to back-test the strategy from December, 1991, to November, 2021, assuming an equally weighted 15-stock portfolio with no more than four stocks an economic sector. Once a month, stocks were sold if they fell below the top 35 per cent of the index based on the above metrics, or if the five-year average ROE turned negative. When sold, stocks were replaced with next qualifying stock not already held in the portfolio, considering the aforementioned sector limits. On this basis, the strategy produced an annualized total return of 16.2 per cent, while the S&P/TSX Composite total Return Index advanced 8.8 per cent.

Only 14 stocks meet the requirements to be purchased into the strategy today and are listed in the table. This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Ian Tam, CFA, is director of investment research for Morningstar Canada.

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