What are we looking for?
Ultraconservative picks in the S&P/TSX 60 index.
The screen
One of the unavoidable pitfalls of investing in the Canadian equity market (relative to the larger, more efficient U.S. markets) is the shortage of liquidity and retail investing options for large companies with brand recognition.
This week I focus my attention on Canada's largest corporations, namely those that make up the S&P/TSX 60 index.
I used a fairly conservative strategy to look for names with steady earnings and sustainable dividends over time.
The strategy ranks stocks based on the following factors:
- five-year historical beta (recall that stocks with beta less than one historically move less than the market during trending periods, while stocks with beta greater than one will move more than the market);
- earnings variability, which looks at the full history of each company’s reported earnings – this measures earnings volatility(lower scores are preferred);
- dividend yield;
- trailing price-to-earnings ratio;
- price-to-book ratio;
- three-month earnings estimate revision (analysts’ current consensus estimate for earnings per share versus three months ago);
- latest quarterly earnings surprise (consensus estimate for EPS just prior to latest report date versus actual reported EPS).
Only stocks in the S&P/TSX 60 were considered in this strategy.
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 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.
What we found
I used CPMS to back-test the strategy from December, 1998, to October, 2015.
During this process, 10 stocks were purchased and equally weighted.
Stocks would be sold if they fell outside the top 40 per cent of the ranked universe.
Over this period, the strategy produced an annualized total return of 12 per cent while the S&P/TSX 60 total return index produced 7 per cent.
The top 10 qualifying stocks today are listed in the table.
As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.