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What are we looking for?

Canadian equities sharing similar fundamentals as the best performers in 2017.

The screen

With 2017 in the rear view, equity investors are likely content but not impressed with the S&P/TSX composite total return index gaining 9.1 per cent in 2017 (nowhere near the monster 21.1-per-cent gain of 2016). This week, I look at a portfolio of the top 35 stocks ranked by total return in the index over calendar year 2017 to see whether these same fundamental characteristics were rewarded over a much longer time frame. The idea here is to capture key fundamental metrics among the best performers last year and then reapply them to generate today's portfolio. On aggregate, those top 35 stocks showed a good combination of:

Three-month estimate revisions (today's consensus estimate compared against the same figure at month end three months ago, higher figures preferred);

Low debt-to-equity relative to the median of the sector to which the stock belongs;

Five-year cash flow and earnings growth rates (on average, how much cash flows and earnings grew each year for the past five years).

To qualify, companies must be part of the S&P/TSX composite total return index. Real estate investment trusts were excluded in this analysis.

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 April, 1995, to November, 2017. During this process, a maximum of 20 stocks were purchased and equally weighted with no more than five stocks per economic sector. Stocks would be sold if their rank fell below the top 35 per cent of the universe. 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 13.1 per cent while the S&P/TSX composite total return index advanced 8.5 per cent. The stocks that meet our requirements for purchase today are listed in the accompanying table. Remember, the companies that show up in this list don't necessarily reflect stellar performance in 2017. However, they do share a combination of fundamental metrics similar to the 35 best performers in 2017.

As always, it is recommended that 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.

Select S&P/TSX stocks showing strong fundamentals

RankCompanySymbolSectorMarket Cap. ($ Mil.)Recent Price ($)D/E Rel. to Sector Median3M Estim. Revision (%)5Y CF Growth Rate (%)5Y EPS Growth Rate (%)Dividend Yield (%)
1Kirkland Lake Gold LtdKL-TMaterials4,145.820.030.110.369.043.80.4
2Lucara Diamond Corp. LUC-TMaterials1,113.42.910.018.221.931.83.4
3Kinaxis Inc.KXS-TIT1,933.675.980.01.333.056.20.0
4Maple Leaf Foods Inc.MFI-TConsumer Staples4,469.135.100.02.130.852.41.3
5New Flyer Industries NFI-TIndustrials3,407.754.151.01.0131.174.92.4
6The Stars Group Inc.TSGI-TConsumer Discr.4,314.429.211.11.352.749.30.0
7Sierra Wireless Inc.SW-TIT944.226.330.0-3.412.267.50.0
8Labrador Iron OreLIF-TMaterials1,753.027.390.020.05.9-7.43.7
9Linamar Corp.LNR-TConsumer Discr.4,830.173.920.52.924.637.60.6
10Enghouse Systems Ltd.ENGH-TIT1,664.161.650.1-2.825.623.11.0
11Parex Resources Inc.PXT-TEnergy2,885.618.610.025.0-11.6-1.00.0
12NuVista Energy Ltd.NVA-TEnergy1,440.18.280.815.08.118.70.0
13Air CanadaAC-TIndustrials7,151.426.192.7-1.871.673.60.0
14Turquoise Hill Ltd.TRQ-TMaterials8,934.74.442.515.825.524.60.0
15Magna Intl. Inc. MG-TConsumer Discr.25,692.771.500.3-0.725.226.41.9
16Premium Brands HoldingPBH-TConsumer Staples3,110.2103.351.50.230.842.51.6
17Enbridge IF HoldingsENF-TEnergy5,210.130.060.0-3.3-2.540.17.5
18Waste Connections Inc.WCN-TIndustrials23,090.987.581.03.126.028.20.8
19WSP Global Inc.WSP-TIndustrials6,148.959.610.55.117.817.82.5
20National Bank of CanadaNA-TFinancials21,241.662.440.01.43.76.43.8

Source: Morningstar Canada