What are we looking for?
The best energy stocks to buy and avoid for the month of June.
Review of last month's recommendations
Yin Luo, quantitative strategist at Macquarie Securities, recommends a portfolio strategy each month for this column. For May, Mr. Luo ranked Canadian energy stocks using valuation and analyst sentiment to sort the stocks.
It turned out that the top 10 ranked stocks returned 16.9 per cent, while the bottom 10 of the energy stocks returned 8.1 per cent. Therefore, his strategy generated a spread of 8.8 per cent in the month.
The other way to measure the performance is to calculate the correlation between the ranking of the stocks and subsequent returns, which is about 7.2 per cent. This means higher-ranked stocks are associated with higher subsequent returns. Since Mr. Luo began contributing to this column, he has outperformed the benchmark in 18 out of 24 months.
Theme for this month
The past three months have been challenging for disciplined investors, Mr. Luo said. That's because most standard stock selection signals reversed trend. "More expensive, slower growth, poorer momentum, lower quality and high-beta stocks outperformed stocks with stronger fundamentals," he said. Exceptions? Investors that used cash-flow-based valuation, cash flow revisions and dividend payout ratios did well.
This month, he proposes a more balanced approach by ranking Canadian energy stocks based on valuation, analyst sentiment (earnings revisions) and quality (return on invested capital).
"Value style tends to perform well in a sharp market recovery, while quality is more likely to hold well if the recovery proves to be short lived," he said. "Analyst revision factors have a great long-term track record in Canada."