What are we looking for?
Companies showing momentum in both earnings and revenue, with a dividend yield higher than the sector median.
The screen
Conservative investors who continue to be concerned about the global trade dispute and the volatility in equities that undoubtedly comes along with it may find some reasonable ideas in this week’s model that I’ve built using Morningstar CPMS, which ranks the largest 250 companies in Canada on the following metrics:
- Five-year deviation in both earnings and total returns – recall that standard deviation is a measure of volatility, lower figures preferred;
- Five-year price beta (a measure of sensitivity, in this case to the main S&P/TSX Composite Index. In trending markets, a beta less than one implies that the stock has moved less than the market, lower figures preferred).
- To qualify to be purchased into the strategy, the company must have quarterly earnings and sales momentum (calculated as the trailing four quarters of earnings or sales against the same measure one quarter ago) that are greater than the market median. The stock must also pay a dividend yield that is higher than the median yield of the economic sector to which it belongs.
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 October, 2005, to July, 2019. During this process, a maximum of 10 stocks were purchased and equally weighted with no more than two per economic sector to ensure reasonable diversification across the economy. Once a month, stocks were sold if their rank fell below the top 35 per cent of the universe, or the quarterly momentum metrics mentioned above dropped below the top two-thirds of the universe. 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 13.6 per cent while the S&P/TSX Composite advanced 6.4 per cent. In the trailing 12-month period ended July, 2019, the strategy produced 15 per cent while the index gained 3.1 per cent.
The stocks that qualify for purchase today and are listed in the accompanying table. It is always recommended to speak to a financial adviser or investment professional before investing.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.
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