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What are we looking for?

Low-risk Canadian stocks selected based on analyst research and revisions.

The screen

Investors often use multiple sources of information when researching stocks, one of which commonly includes seeing what analysts are saying on a particular company of interest. Analysts have many ways of converting their highly skilled research process into output that can be easily understood by the average investor, such as rating a stock a buy, sell or hold; offering estimate expectations; and then later revising those estimates if new information comes to light. These metrics can be a useful way for investors to help determine whether the companies they are considering should be added to their portfolio.

Today, I’m showcasing a strategy that searches for low-risk Canadian stocks that appear to be positively viewed by analysts. This strategy ranks stocks based on:

  • Five-year beta (measures a company’s sensitivity relative to historical changes in the benchmark – here we use the S&P/TSX Composite Index -- low values are best);
  • Three-month revision of median analyst recommendation, (for example, if the median analyst recommendation of a company jumps from a three to a four, that would be considered a 33-per-cent positive revision - high values are best);
  • Lastly, stocks are also ranked by the 60-day median earnings-per-share analyst revision high values are best.

In order for stocks to qualify, they must have a:

  • Five-year beta less than or equal to one (to reduce market sensitivity);
  • Median analyst recommendation greater than or equal to three (recall that analysts can score companies on a scale of one to five, five being a strong buy - high values are best);
  • Earnings variability that is lower than half of all stocks in the CPMS Canadian universe (today this value is 16.9 per cent or less - low values best);
  • Three-month revision of median analyst recommendation greater than zero;
  • 60-day median EPS revision greater than or equal to zero.

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 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.

What did we find?

I used Morningstar CPMS to back test this strategy from October, 2005, to February, 2018. During this process, a maximum of 15 stocks were purchased. Stocks were sold if their five-year beta rose higher than 1.2 or if their median analyst recommendation fell below three. 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 16.1 per cent while the S&P/TSX Composite Total Return Index advanced 6.3 per cent across the same period. Downside deviation (measured as the variability of negative returns) was 6.3 per cent compared with the S&P/TSX Composite Total Return Index, which had a downside deviation of 9.1 per cent.

Stocks that qualify for purchase into the strategy are listed in the accompanying table. Note that only 13 stocks currently qualify. Investors are encouraged to conduct their own independent research before buying any of the investments listed here.

Low-risk stocks with positive analyst research, revisions

RankCompanyTickerMarket Cap ($Mil)Recent Price ($)Div. Yield (%)Median Analyst Recom. (1-5)Earns Variability (%)5Yr Beta3M Rev. of Median Analyst Recom. (%)60D Rev. of Median EPS (%)
1Canfor Pulp ProductsCFX-T 1,082.6 16.591.5415.80.333.365.2
2Superior Plus Corp.SPB-T 1,762.7 12.345.8414.10.933.315.6
3Keyera Corp.KEY-T 6,885.6 33.515.0512.40.912.523.8
4Sun Life Financial Inc.SLF-T 32,252.6 52.913.446.60.533.35.1
5Mediagrif InteractiveMDF-T 153.7 10.353.949.00.433.30.0
6Richelieu Hardware Ltd.RCH-T 1,738.1 30.120.852.40.525.00.0
7Cogeco Inc.CGO-T 1,006.2 68.492.3411.20.733.30.0
8CI Financial Corp.CIX-T 7,466.6 27.605.145.60.816.73.4
9Capital Power Corp.CPX-T 2,528.7 24.246.948.80.733.30.0
10Chesswood Group Ltd.CHW-T 179.4 10.827.845.40.814.33.6
11Toronto-Dominion BankTD-T 134,912.7 73.113.753.80.711.12.8
12Pembina Pipeline Corp.PPL-T 20,234.4 40.205.457.50.912.51.8
13TFI International Inc.TFII-T 2,953.4 33.112.546.

Source: Morningstar Canada

Emily Halverson-Duncan is a director, CPMS sales at Morningstar Research Inc.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 17/05/24 3:43pm EDT.

SymbolName% changeLast
Canfor Pulp Products Inc
Superior Plus Corp
Keyera Corp
Sun Life Financial Inc
Mdf Commerce Inc
Richelieu Hardware Ltd
Cogeco Inc Sv
CI Financial Corp
Capital Power Corp
Chesswood Group Ltd
Toronto-Dominion Bank
Pembina Pipeline Corp
Tfi International Inc

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