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Number Cruncher Twelve Canadian companies showing what steady earnings growth looks like

What are we looking for?

Canadian companies conservatively growing earnings.

The screen

This week, I use Morningstar CPMS to look for companies that have shown a decent growth in earnings recently, and that Street analysts believe will continue to grow in the upcoming fiscal year. To find these companies, I first ranked the 700 companies in the Morningstar Canadian database on the following factors:

  • Quarterly and annual earnings momentum (trailing four quarters of operating earnings compared (Swith the same figure one quarter and four quarters ago, respectively);
  • Estimated annual earnings-per-share growth rate (the expected year-over-year EPS growth rate from the Street);
  • Latest reported return on equity;
  • Five-year EPS deviation (a statistical measure showing how volatile a company’s earnings have been, not shown).

To qualify, companies must have a market cap greater than $100-million (this figure is meant to exclude the bottom one-third of stocks in our universe by size). Additionally, companies that had a debt-to-equity (D/E) ratio higher than the median of the sector to which they belonged were excluded to avoid overly leveraged companies (in the table, a figure of 1.0 would imply that the company has the same D/E ratio than its sector median).

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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.

What we found

I used Morningstar CPMS to back test this strategy from May, 1992, to February, 2019. During this process, a maximum of 15 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 35 per cent of the ranked universe, or if a company’s earnings turned negative (not shown). 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 12.2 per cent while the S&P/TSX Composite Total Return Index advanced 8.6 per cent. Over this time frame, there were 35 quarters where the index showed negative returns. Of these quarters, our strategy outperformed the market 83 per cent of the time (29 of 35 quarters), which speaks to the defensive nature of this model, despite being focused on growth measures.

Only 12 stocks qualify for purchase today; they are listed in the accompanying table. It is always recommended to speak to a financial adviser or investment professional before investing.

Select TSX stocks showing earnings momentum

RankCompanyTickerMarket Cap ($Mil)Qtrly Earns Momentum (%)Annual Earns Momentum (%)Expected EPS Growth Rate (%)Trailing ROE (%)D/E Rel. to Sector Median
1BCE Inc.BCE-T 53,563.4 2.02.30.919.20.59
2Bank of MontrealBMO-T 65,206.5 2.014.56.614.30.70
3Royal Bank of CanadaRY-T 147,885.7 0.19.22.517.60.56
4Equitable Group Inc.EQB-T 1,144.5 3.17.413.314.50.00
5Toromont Industries Ltd.TIH-T 5,670.6 10.353.512.021.10.99
6Boyd Group Income FundBYD-UN-T 2,842.2 6.635.617.716.80.90
7WSP Global Inc.WSP-T 7,592.4 4.918.514.311.40.92
8Valener Inc.VNR-T 1,028.1 8.713.12.58.50.10
9Gildan ActivewearGIL-T 10,142.9 7.17.43.820.20.60
10ATS Automation ToolingATA-T 1,810.6 9.235.010.911.90.86
11Shaw CommunicationsSJR-B-T 14,308.0 10.018.34.712.80.41
12Hydro One Ltd.H-T 12,395.6 0.815.51.98.00.95

Source: Morningstar CPMS

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

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