What are we looking for
Canadian analyst favourites prior to reporting season.
The screen
In the next 30 days, about 500 of the 700 companies in the Morningstar CPMS Canadian database will be reporting their latest quarterly earnings as we head into the fourth quarter reporting season in Canada. During this time, Street analysts will be updating their predictions, forecasts and general sentiment of the stocks that they cover as new information is revealed. This week, I take a snapshot at Street sentiment in Canada by looking to stocks that the institutional sell side favours in aggregate. To do this, I ranked stocks on the following metrics:
- Ninety-day estimate revisions (the current median consensus estimate for fiscal year 2018 earnings per share [EPS] against what it was 90 days ago);
- Estimated growth rate of earnings (the median EPS estimate for a company’s current fiscal year as a percentage change from the median EPS estimate from the previous fiscal year);
- Ninety-day up/down revision ratio (the number of analysts that revised their estimate upward minus the number of analysts that revised their estimates downward divided by the total number of active analysts, positive figures preferred);
- Variation in estimates (a statistical measure essentially looking at the dispersion of active estimates, lower figures preferred);
- Five-year price beta against the S&P/TSX composite index (recall that the companies with a beta lower than one has historically moved less than the index in trending markets. Here, we prefer lower beta to reduce risk).
In today's analysis, only the largest 250 names in Canada were considered (measured by market capitalization), excluding unit trusts. In addition, only companies with at least five active analyst estimates were considered.
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 May, 2002, to September, 2017. During this process, a maximum of 20 stocks were purchased with a maximum of five per economic sector. Stocks are sold if their rank falls below the top 50 per cent of our universe. When sold, the positions are replaced with the highest ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 12.2 per cent while the S&P/TSX composite total return index produced 7.6 per cent. The top 13 appear in the table above.
It's recommended investors 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.