What are we looking for?
Growth stocks, American-style. Following up on this past week's Number Cruncher, which searched for Canadian companies with an attractive outlook and improving profitability, we'll apply the same methodology to U.S. firms.
More about today's screen
Craig McGee, senior consultant at CPMS Morningstar Canada, created a screen to look for growth companies with a brightening profit outlook. He ranked 2,271 U.S. firms and selected the top 20 stocks with a market cap greater than $1-billion (U.S.). To guard against too much focus on any single industry, he allowed no more than five stocks from any one sector.
The criteria he examined were:
– four-year average return on equity (ROE);
– three-month consensus 2012 earnings-per-share (EPS) estimate revisions;
– Annual rate of change of ROE;
– Annual rate of change of EPS;
– Annual rate of change of revenue;
– Annual rate of change of operating cash flow;
– Change in net margin.
More about CPMS
CPMS, a division of Morningstar Canada, provides quantitative North American equity research and portfolio analysis to primarily institutional clients. It covers more than 700 Canadian and 2,200 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?
Stocks with growing earnings can shine in a lacklustre economy. Year-to-date, the median return from stocks in this list is 30.8 per cent while the S&P 500 Total Return Index has been essentially flat over the same period.
Remember, though, that the past doesn't necessarily foretell the future. Growth stocks are volatile; they require constant monitoring and frequent trading. Some of the names on the list, such as casino operator Las Vegas Sands and travel merchandiser Priceline.com , are not for the faint of heart.
"Readers should proceed with caution with this type of strategy as many investors may steer away from these 'growthy' names in search of income plays if markets become more volatile," cautions Mr. McGee.