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What are we looking for?

Canadian stocks with growth characteristics.

The screen

With Monday’s promising news regarding the effectiveness of Pfizer Inc.'s experimental COVID-19 vaccine, people may soon begin to breathe a sigh of relief. The thought of a return to normalcy – whatever that may look like – will be a welcome sign for companies struggling with the reduced demand and foot traffic the pandemic has caused. For investors, this will ideally translate into gains in their portfolios as stocks can reap the benefits of fully functional operations.

Today’s strategy is going to look at Canadian growth stocks in the CPMS 250, which is a CPMS universe consisting of the largest 250 companies by market float.

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Stocks are ranked based on:

  • Trailing reinvestment rate (calculated as trailing earnings per share less dividends paid divided by book value), which is a measure of the rate a company has reinvested earnings back into its business, higher values preferred;
  • Forward reinvestment rate (same as above, but using expected EPS and expected dividends);
  • Three-month EPS estimate revision, which measures the percentage changes in median EPS estimate over the past three months, higher values preferred;
  • Quarterly earnings surprise, a proprietary measure of the difference between actual and expected quarterly earnings, a higher value is best;
  • Quarterly sales momentum, which compares the most recent four quarters of sales to the same metric one quarter ago, higher values preferred.

In order to qualify, stocks must have:

  • Quarterly earnings surprise greater than or equal to zero;
  • Three-month EPS estimate revision greater than or equal to zero;
  • Market float in the top two thirds of peers (today this value is $763.95-million or higher).

Market float (as opposed to market capitalization) considers only shares available for public trading, removing any shares that are under restricted sale, typically issued to senior management.

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

What we found

I used Morningstar CPMS to back test this strategy from December, 1991, to October, 2020. During this process, a maximum of 20 stocks were purchased. Stocks were sold if their quarterly earnings surprise fell below minus 2 per cent or if their three-month EPS estimate revision fell below minus 10 per cent. 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 15.1 per cent while the S&P/TSX Composite Total Return Index advanced 7.9 per cent on the same basis. Stocks that qualify for purchase into the strategy today are listed in the accompanying table. As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Select Canadian growth stocks

RankCompanyTickerMkt. Cap. ($ Mil.)Mkt. Float ($ Mil.)Div. Yld. (%)Trail. Reinv. Rate (%)Fwd. Reinv. Rate (%)3M EPS Estim. Rev. (%)Qtly. Earns. Surprise (%)Qtly. Sales Mom. (%)12M Price Chg. (%)Recent Price ($)
1Ero Copper Corp.ERO-T1,669.91,386.00.073.9103.816.94.811.9-5.619.35
2BRP Inc.DOO-T3,130.43,095.80.038,306.044,600.00.0168.3-2.514.674.52
3K92 Mining Inc.KNT-T1,631.41,605.
4Constellation Soft.CSU-T33,325.531,326.80.373.590.72.315.53.810.71,572.59
5Cargojet Inc.CJT-T3,783.13,518.20.424.439.
6Bausch Health Cos.BHC-T7,706.86,700.80.0227.5283.42.615.9-0.8-42.221.70
7Dollarama Inc.DOL-T15,251.414,176.60.4520.1642.
8Quebecor Inc.QBR-B-T8,280.35,773.72.437.
9Endeavour MiningEDV-T5,707.24,
10Norbord Inc.OSB-T3,537.12,014.85.523.122.836.30.017.520.943.83
11Real Matters Inc.REAL-T2,164.02,
12Centerra Gold Inc.CG-T4,031.52,928.91.516.525.820.728.
13goeasy Ltd.GSY-T1,172.5803.12.322.025.712.919.01.112.878.81
14Cdn. Pacific RailwayCP-T56,104.056,104.00.924.729.03.80.0-0.832.6417.13
15Aritzia Inc.ATZ-T1,718.21,716.
16Shopify Inc. SHOP-T149,819.4147,337.,361.45
17Alim. Couche-TardATD-B-T50,550.139,022.40.620.717.722.423.3-7.54.545.42
18FirstService Corp. FSV-T8,191.26,946.00.517.020.20.826.7-0.547.9188.00
19Open Text Corp.OTEX-T14,716.414,689.31.916.815.44.526.53.5-6.654.03
20MTY Food GroupMTY-T1,021.4786.40.09.812.533.5240.4-4.1-26.141.34

Source: Morningstar CPMS. 

Data as of Nov. 6

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

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