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What are we looking for?

Stocks across multiple sectors that display positive and stable earnings growth.

The screen

As earnings season wraps up, many investors are nearly finished watching whether their investments have beat or missed earnings expectations. Although company earnings reports can have an impact on the price of a stock, they are more relevant for a short-term view. For a long-term perspective, investors are better off considering stocks diversified across sectors that have a history of growing earnings combined with positive forward looking outlooks.

Today I use Morningstar CPMS to look for stocks that have displayed positive earnings growth for the past five years and attractive earnings growth potential.

Our criteria included:

  • Five-year normalized earnings growth (annual compound growth of earnings per share averaged over the past five years);
  • Expected growth of EPS for the current year (EPS estimate for the current year vs. actual EPS last year);
  • Expected growth of EPS for next year (EPS estimate for next year vs. EPS estimate for the current year);

Stocks are only purchased in the strategy if they have a market cap of at least $100-million to ensure they are not smaller-cap stocks, which pose higher risk and are more susceptible to volatile price swings. Stocks must not have negative earnings growth for the past five years. We also looked for attractive five-year earnings variability – a lower figure was preferred. Finally, stocks must not have a negative earnings growth outlook for the current year and next year.

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, 1999, to October, 2016. During this process, a maximum of 15 stocks were purchased and equally weighted with a maximum of two stocks a sector.

Stocks would be sold if they fell outside the top 30 per cent of the ranked universe or if the stock's EPS growth outlook for either the current year or next year fell below minus 10 per cent.

Over this period, the strategy produced an annualized total return of 10.6 per cent while the S&P/TSX composite total return index advanced 4.7 per cent. Today, 15 stocks qualify for purchase into the strategy and are listed in the accompanying table.

As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Michael Pe, CFA, is an institutional product specialist for CPMS at Morningstar Research Inc.

 Select TSX stocks with a history of earnings growth

RankCompanySymbolSectorMkt Cap $Mil5Y Earn. Grwth (%)Expected EPS Grwth/Curr. Yr (%)Expected EPS Grwth/Next Yr (%)5Y Earn. Variability (%)Avg Mthly Value Traded ($Mil)Div. Yield (%)
1Avigilon Corp.AVO-TIT511.283.920.035.810.837.20.0
2ShawCor Ltd.SCL-TEnergy2,056.90.3404.312.015.083.01.9
3Endeavour Mining Corp.EDV-TMaterials2,016.820.5115.135.116.3140.20.0
4Platinum Group MetalsPTM-TMaterials234.417.687.366.116.46.90.0
5Hardwoods Dist. Inc.HWD-TIndustrials375.561.525.613.213.810.81.4
6Constellation SoftwareCSU-TIT13,085.854.113.713.67.2465.80.9
7Tricon Capital GroupTCN-TReal Estate996.272.19.310.215.853.32.9
8Chartwell RetirementCSH.UN-THealth Care2,757.917.180.025.014.7108.93.9
9Peyto Expl. & Dev. CorpPEY-TEnergy5,635.39.674.343.49.1334.63.9
10Aliment'n Couche-TardATD.B-TCons. Staples35,869.944.213.717.47.71,125.20.5
11Melcor DevelopmentsMRD-TReal Estate412.43.4117.019.212.91.93.9
12AGT Food & IngredientsAGT-TCons. Staples844.237.526.416.716.857.81.7
13Valeant PharmaceuticalVRX-THealth Care8,198.840.85.729.810.61,233.30.0
14Student TransportationSTB-TIndustrials696.445.515.20.013.628.07.8
15Element Fleet Mgmt.EFN-TFinancials4,327.842.510.09.113.4497.90.9

Source: Morningstar Canada