What are we looking for?
To celebrate the busiest week in the Canadian earnings-reporting season, we're looking for TSX companies that have pulled off the trifecta of earnings "beats" – exceeding analysts' consensus estimates not only for profits, but for sales and cash flow, too.
Screening for the beats
Craig McGee, senior consultant at CPMS Morningstar Canada, created today's stock screen. The screen criteria were:
-$500-million or more in market capitalization;
-Quarterly financial results released within the past 30 days;
-A "surprise" score of better than a "C" for quarterly earnings, cash flow and sales.
(CPMS assigns school-like letter grades to indicate the degree by which a company's results exceeded or fell short of analysts' expectations. Anything above a "C" indicates a number that beat consensus estimates; anything below "C" is a miss.)
Mr. McGee sorted the companies that met these criteria by the year-to-date returns of their stocks. For informational purposes, he also included the 30-day revisions of the consensus estimates for earnings, cash flow and sales.
CPMS, a division of Morningstar Canada, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers, through software and Web-based tools. It covers more than 700 Canadian and 2,200 U.S. stocks, and adjusts for unusual accounting items in each company's quarterly results.
What did we find?
The screen generated just 17 Canadian companies that met the criteria.
Twelve of the 17 stocks on the list have posted positive returns for the year to date (as of Monday's close), with a median return of 5.3 per cent – well above the S&P/TSX composite index's year-to-date decline of 0.8 per cent. That suggests that while analysts have been behind the curve on the strength of the key financial growth numbers, investors have recognized and rewarded the potential of many of these stocks for upside earnings surprises.
There are a couple of glaring instances where the market hasn't rewarded the better-than-expected quarter – Thompson Creek Metals Co. Inc. and TransAlta Corp. But in both cases, there are looming risks outside of the financial results that have been keeping investors away. It's a lesson in how investors need to dig beyond the numbers when making investment decisions.
David Parkinson