What are we looking for?
Canadian consumer defensive and consumer cyclical stocks that remain profitable and are growing earnings.
Dollarama Inc., one of Quebec's star retailers, on Wednesday reported a substantial increase in profit in its first quarter. However, Dollarama has not been alone in its strong performance, and as investors know, robust earnings are often tied to stock appreciation. Over the trailing 90 days, of the 89 stocks in the consumer sectors (defensive and cyclical), 45 showed total returns greater than 5 per cent, and 35 showed gains greater than 10 per cent. To find stocks in these two sectors that have shown consistent growth in earnings I've created a strategy that ranks stocks on the following factors:
- Trailing return on equity (a profitability metric, taking the trailing earnings and dividing by the book value of equity);
- Five-year normalized EPS growth rate (here we take the trailing 60 months of trailing EPS and measures the rate of change of these earnings over the past five years);
- Variability of historical EPS (a proprietary calculation measuring how consistent a company’s historical earnings are – lower figures preferred).
To qualify, companies must have reported a positive EPS in the past quarter, and must be classified as either consumer cyclical, or consumer defensive.
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 Morningstar CPMS to back test this strategy from June, 1990, to May, 2017. During this process, a maximum of 10 stocks were purchased. Stocks were sold if their rank falls below the top 30 per cent of the universe, or if the company reported negative earnings. When sold, the positions were replaced with the highest-ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 12.6 per cent while the S&P/TSX consumer discretionary, consumer staples and composite total return indexes gained 8.5 per cent, 13 per cent and 8.2 per cent, respectively. Stocks that qualify for purchase into the strategy today 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.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.
|Rank||Company||Ticker||Morningstar Industry||Market Cap. ($Mil)||Trailing ROE (%)||Latest Reported EPS ($)||5Yr EPS Growth Rate (%)||Earnings Variability||Dividend Yield (%)|
|1||CCL Industries Inc.||CCL.B-T||Packaging & Containers||11,597.0||23.8||2.37||49.7||7.4||0.7|
|2||Dollarama Inc.||DOL-T||Discount Stores||14,539.5||203.3||3.76||31.1||11.8||0.3|
|3||Linamar Corp.||LNR-T||Auto Parts||4,058.4||21.8||8.58||47.8||10.6||0.8|
|4||New Flyer Industries||NFI-T||Auto Manufacturers||3,498.7||22.8||2.99||302.5||14.4||2.3|
|5||Aliment'n Couche-Tard||ATD.B-T||Grocery Stores||36,579.8||21.7||2.70||35.4||7.7||0.6|
|6||Magna Int'l. Inc.||MG-T||Auto Parts||23,424.4||21.5||7.30||30.0||7.3||2.4|
|8||Great Cdn. Gaming Corp.||GC-T||Gambling||1,461.1||23.1||1.43||30.8||10.8||0.0|
|9||Goeasy Ltd.||GSY-T||Specialty Retail||420.6||18.5||2.68||31.7||7.9||2.3|
|10||AGT Food & Ingredients||AGT-T||Farm Products||624.2||15.3||2.06||49.2||16.8||2.3|
Source: Morningstar Canada
Note: All stocks shown here are considered consumer stocks as defined by both GICS and Morningstar Sector classification schemes.