Craig McGee is a senior consultant at Morningstar Canada.
What are we looking for?
Value and growth from Canadian large caps.
For this screen, I wanted to look for a diversified basket of larger cap Canadian stocks that exhibited a good mix of these characteristics. Using a subset of the largest 200 stocks in Canada, I scanned the CPMS database for up to 20 names with the best combination of the following metrics:
– forward price to earnings;
– Forward return on equity;
– Quarterly earnings momentum (QEM); that is, the percentage change in the latest four quarters' earnings per share compared with the four quarters' EPS of one quarter ago;
– Revision of the consensus EPS estimate over the past three months;
– Latest quarterly earnings surprise;
Stocks also required a minimum expected dividend yield of 2 per cent and at least two analysts covering each company on earnings. No more than three stocks were allowed per sector.
More about Morningstar
Morningstar 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
Using CPMS, I back-tested the strategy to apply the same rules-based approach starting Dec. 31, 1991. A portfolio of up to 20 stocks was equally weighted and stocks would be replaced if their rank fell outside of the top 40 per cent of the subset of 200 largest stocks or if yield dropped below 1 per cent.
Over the past five years, this strategy generated an annualized total return of 16.3 per cent while the S&P/TSX Total Return Index came in with 10.7 per cent. For the full period starting Dec. 31, 1991, this approach would have posted an annualized return of 15.5 per cent compared with 9.3 per cent for the index.
As always, investors are advised to do their own research before investing in any of the stocks shown here.