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What are we looking for?

Investors are typically interested in growth stocks because of the potential for higher returns than the overall market. For some, the added risk and volatility are a worthwhile cost for potential outperformance over the long term.

Today, I use Morningstar CPMS to look for stocks that display a history of earnings and sales growth combined with recent price momentum.

The screen

Stocks are ranked from the current CPMS universe of 709 stocks and are based on the following factors:

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  • Five-year earnings growth rate;
  • Five-year sales growth rate;
  • 12-month price change.

Additionally, stocks are only included that have a market capitalization above the median value in the universe (currently $546-million); and where earnings and sales growth figures over the past year, and analyst consensus estimates for one-year earnings growth, are all positive.

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

Stocks that outperform

RankCompanyTickerSectorMkt. Cap. ($ Mil.)5Y Earns. Grth. Rate (%)5Y Sales Grth. Rate (%)12M Price Chg. (%)1Y Earns. Grth. (%)1Y Sales Grth. (%)Expected Ann. Earns. Grth. (%)Div. Yld. (%)Recent Price ($)
1Champion Iron Ltd.CIA-TMaterials 2,940.5 32.042.5345.2137.326.0194.70.06.01
2Kirkland Lake Gold Ltd.KL-TMaterials 11,495.4 62.342.43.922.740.421.62.243.05
3Torex Gold ResourcesTXG-TMaterials 1,406.1 42.854.720.698.223.366.50.016.44
4Shopify Inc. SHOP-TInfo. Tech. 159,700.3 34.6104.8141.3448.172.7445.20.01,422.91
5Goeasy Ltd.GSY-TFinancials 1,941.6 40.015.0260.544.79.250.32.0131.18
6Pretium Resources Inc.PVG-TMaterials 2,462.9 37.954.263.664.228.4100.70.013.14
7B2Gold Corp.BTO-TMaterials 5,942.6 58.027.032.6116.951.464.22.85.65
8Canaccord GenuityCF-TFinancials 1,199.0 56.15.2187.373.740.986.52.112.44
9Canacol Energy Ltd.CNE-TEnergy 653.4 56.021.72.0185.730.812.05.73.64
10BRP Inc.DOO-TCons. Discr. 4,266.4 27.318.8322.027.72.433.50.596.90
11Boralex Inc.BLX-TUtilities 4,224.7 54.47.864.7261.42.9191.01.641.17
12Absolute SoftwareABST-TInfo. Tech. 971.0 43.62.7129.413.31.311.21.619.77
13Cargojet Inc.CJT-TIndustrials 3,022.4 43.95.672.6544.621.0406.90.6174.60
14Pollard Banknote Ltd.PBL-TCons. Discr. 1,342.8 17.812.1195.660.13.596.40.350.10
15FirstService Corp. FSV-TReal Estate 8,294.4 23.814.974.415.64.115.70.5189.31
16GDI Integrated FacilityGDI-TIndustrials 670.8 23.58.175.0222.95.5228.50.049.00
17Enghouse Systems ENGH-TInfo. Tech. 3,399.0 22.711.341.135.923.316.31.061.41
18Equitable Group Inc.EQB-TFinancials 2,369.1 10.516.5141.83.21.428.81.1140.40
19ECN Capital Corp.ECN-TFinancials 2,012.6 3.229.7118.911.55.014.41.58.23
20Constellation SoftwareCSU-TInfo. Tech. 36,093.1 16.718.533.229.114.825.80.31,703.19

Source: Morningstar CPMS

I used CPMS to back-test the strategy from January, 2010, to February, 2021. During this process, a maximum of 20 Canadian stocks were purchased and equally weighted at the start of each quarter, with a maximum of five stocks per sector to prevent overexposure to one sector. The entire portfolio is reselected each quarter based on rank. (Stocks in the previous portfolio that still make the top 20 remain – they don’t need to be sold and repurchased.)

Over this period, the strategy produced an annualized total return of 15.5 per cent while the S&P/TSX Total Return Index advanced 7.1 per cent. Standard deviation (which measures the volatility of returns) for the strategy was 14.8 per cent while the benchmark measured 11.8 per cent. The stocks that currently qualify for purchase into the strategy are shown in the accompanying table.

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

Michael Pe, CFA, is a product manager for CPMS at Morningstar Research Inc.

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.

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