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What are we looking for?

Canadian energy stocks with rising cash flows.

Bay Street watches cash flows closely, especially at energy firms, because cash flow can often be a better measure of financial health than standard earnings.

How we did it

Craig McGee, senior consultant at Morningstar Canada, looked for Canadian energy stocks on which analysts have boosted estimates for cash flow over the past two months.

The accompanying table shows the top 20 stocks in the CPMS Canadian database based on this search. Each stock's dividend yield, share price to cash flow and share price to earnings are included as additional information.

More about Morningstar

Morningstar Inc. provides independent investment research in North America, Europe, Australia and Asia. Its investment research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS figures cover more than 95 per cent of the investable North American stock market.

What we found

To see how an investor would have fared using this approach, Mr. McGee ran a historical simulation using the CPMS Backtest to select the Canadian energy stocks with the highest revisions to consensus cash flow estimates over the previous two months.

He assumed that a hypothetical investor would have selected the top 20 stocks every quarter and held equal dollar amounts of each of those stocks for the next three months. (Mr. McGee excluded the bottom quarter of the CPMS database based on market cap and average volume to remove small stocks that don't trade frequently.)

Beginning on Dec. 31, 1998, the portfolio would have generated an annualized total return of 27.8 per cent. The S&P/TSX Energy Index posted a total return of 14.3 per cent while the S&P/TSX composite came in at 7.1 per cent over the same period.

Those are encouraging results, but energy stocks can go in and out of favour quickly. Investors should do their own research before buying any of the stocks listed here.

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