What are we looking for?
Stocks to steer away from.
More about today's screen
We'll look for help today from Morningstar CPMS, an equity research shop. It has what it calls its "dangerous" portfolio, in which it identifies stocks with declining earnings and earnings expectations, high valuations and high debt. More specifically, the portfolio screens for the worst stocks for:
· earnings growth over the trailing four quarters;
· earnings yield based on analysts' earnings estimates for the upcoming year;
· price-to-book value;
· negative earnings surprises for the most recent quarter;
· three-month revision of earnings estimates;
· ratio of debt to equity;
· ratio of trailing four quarters' cash flow to debt.
CPMS senior consultant Craig McGee created a portfolio of companies that have a market cap greater than $250-million and which hold long-term debt. The worst 10 are shown in the table.
More about CPMS
CPMS is an equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 680 of the largest and more liquid Canadian stocks, plus more than 2,100 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company's quarterly results to make sure screens can perform correctly.
What did we find out?
Mr. McGee looked back to 1985 and found that a 30-stock portfolio using these characteristics has produced a total loss of 7.9 per cent annually including dividends, compared to a gain in the S&P/TSX total return index of 8.6 per cent. This year, the portfolio is down 23 per cent, versus the S&P/TSX total return, which is down 4.1 per cent.
Mr. McGee warns investors that this portfolio isn't a slam dunk for short sellers. In 1999 and in 2009, the portfolio rose 78 and 85 per cent, respectively, as investors chased speculative, or highly leveraged and volatile stocks.
Footnotes to Accompanying Table
* Percentage change of the latest 4 quarters operating EPS versus the 4 quarters of operating EPS one quarter ago.
** EPS / Price using estimated EPS