What are we looking for?
Canadian growth-oriented stocks within the S&P/TSX 60.
The screen
When managing your investment portfolio, there is usually a desire to mitigate risk. While there are many methods you can use to help accomplish this, one simple way is to focus on larger companies with a long track record of success and steering clear of smaller companies with not much of a history.
Today, I'm showcasing a strategy that looks for Canadian growth-oriented companies within the universe of the S&P/TSX 60 (an index of 60 large-cap companies in Canada). The strategy ranks stocks based on trailing return on equity (a profitability metric; high values best), five-year cash flow growth (high values best), and five-year sales growth (high values best). Stocks that qualify must have:
Trailing ROE greater than or equal to 5 per cent;
- Five-year annualized cash flow growth greater than zero;
- Quarterly earnings momentum (measured as the growth in the most recent trailing four quarters earnings relative to the trailing four quarters earnings lagged by one quarter) greater than zero;
- Quarterly earnings surprise (proprietary measure of the difference between actual and expected quarterly earnings) greater than zero;
- Five-year annualized sales growth greater than 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 we found
I used Morningstar CPMS to back-test this strategy from November, 2002, to December, 2017. During this process, a maximum of 10 stocks were purchased. Stocks were sold if their quarterly earnings momentum or quarterly earnings surprise dropped below minus-6 per cent. When sold, the positions were replaced with the highest-ranked stock not already owned in the portfolio. The strategy produced an annualized total return of 13.8 per cent while the S&P/TSX composite total return index advanced 9.3 per cent across the same period. 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.
Emily Halverson-Duncan is an account manager for CPMS at Morningstar Research Inc.