Year to date, the S&P/TSX Composite Total Return Index has lost about 3.7 per cent, arguably driven by the poor performance of Energy, Materials, and Financials sectors in early part of the first quarter. Recall that these three sectors alone make up almost 65% of the S&P/TSX Composite (at the end of Q1 2018).
But consider that trailing economic statistics look hopeful for Canada as a whole, with our unemployment rate at all-time lows, and our capacity utilization rate at 12 year highs (signifying a productive economy). Investors with a medium- to long-term time horizon that believe our economy will continue to grow may consider this week’s strategy for some steadily growing companies.
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To find these steady-grower stocks, I first ranked stocks on the following factors:
- Deviation of EPS over five years (a risk metric that measures how stable companies earnings have been over the trailing five years –lower figures preferred);
- Five-Year Sales, Earnings per Share, and Cashflow Growth Rates (these figures represent on average, how much top-line revenue, bottomline earnings, and cashflows have grown each year in the last five years –higher figures preferred);
- Average Return on Equity over the trailing five years.
Only the largest 250 names in Canada by Market Float were considered in this analysis (excluding REITS).
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What we found
I used Morningstar CPMS to back test this strategy from April 1995, to March 2018. During this process, 15 stocks were purchased and equally weighted with a maximum of 4 stocks per economic sector. Once a quarter, we sell any stocks that rank below the top 25% of our universe based on the above factors, or if any of the long-term growth stats turned negative. When this happens, we sell the stock and replace it with the highest ranked stock not already in our portfolio. Over this period, the strategy produced an annualized total return of 12.2% while the S&P/TSX Composite Total Return Index produced 8.2%.
The below table shows a clear picture of how such a strategy performed in trailing periods:
The stocks that qualify for purchase into the strategy today are listed in the table below. As always, it is advised that investors conduct their own independent research before buying or selling any security.
|Rank||Symbol||Company||Market Cap ($CAD Millions)||Earnings Variability||5Y Sales Growth (%/year)||5Y EPS Growth (%/year)||5Y Cashflow Growth (%/year)||5Y Average Return on Equity (%)||Trailing Return on Equity (%)||Dividend Yield (%)|
|1||MTY||MTY Food Group Inc.||1176.3||2.49||28.4||14.71||27.53||18.74||13.91||1.28|
|2||CNR||Cdn National Railway||71220.9||2.42||7.83||13.79||14.34||23.45||24.31||1.89|
|3||BNS||Bank of Nova Scotia||92078.2||1.69||5.82||6.72||11.41||15.2||14.99||4.27|
|6||NA||National Bank of Canada||20161.4||2.42||4.04||6.66||4.22||17.92||17.96||4.05|
|8||GWO||Great-West Lifeco Inc.||33003.6||2.74||12||5.59||3.93||14.91||13.38||4.66|
|9||RY||Royal Bank of Canada||140485.2||2.93||6.25||7.86||7.12||18.24||17.67||3.87|
|10||WCN||Waste Connections Inc||24784.5||4.74||26.56||28.83||26.18||10.12||9.73||0.76|
|11||CCL.B||CCL Industries Inc., B||11079.3||7.35||29.71||39.95||29.59||19.66||23.39||0.83|
|13||GIB.A||CGI Group Inc., A||18833.7||4.07||4.03||13.5||9.86||18.08||17.33||0|
|15||CTC.A||Cdn Tire Corp. Ltd.||11241.6||4.18||6.67||10.85||2.29||12.25||15.4||2.12|
Ian Tam is the Manager of the client services team at CPMS, a division of Morningstar that focuses on providing high quality equity fundamental data and disciplined rules-based investment processes to the institutional buyside and investment advisors across North America.
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