We are currently experiencing intermittent difficulty during Premium user registration. We appreciate your patience as we investigate.

Two Canadian stocks for turbulent times

These companies have stable earnings that make them attractive in volatile markets, according to CPMS data.

Catherine Multon 2 November, 2015 | 6:00PM
Facebook Twitter LinkedIn

Stable, growing earnings and stock prices that show resilience to market downturns are highly desirable characteristics, especially in volatile periods such as those we've experienced in the recent past.

Metrics tracked in the Canadian equity universe by Morningstar's CPMS division help assess the predictability of corporate earnings. One such metric, "earnings variability rank" measures the volatility of a company's reported earnings per share on a quarterly basis, using the company's entire history of quarterly earnings. It also calculates by how much (or how little) quarterly earnings tend to miss the consensus estimate.

Another key variable employed in assessing stocks is the covariance of the current-year earnings estimates, or spread in estimates. This indicates which stocks exhibit a high degree of consensus among the analysts' earnings estimates, or a "tight spread" of the estimates. If the analysts' estimated values are close together, there is less uncertainty, and therefore less perceived risk in owning the stock.

Based on these and other variables, here are two stocks that are rated Buys according to CPMS, while exhibiting characteristics consistent with relatively strong performance during volatile markets:

Sun Life Financial Inc. (SLF)

The best example we found of a company showing high earnings and resistance to down markets is Sun Life Financial Inc., which grades very highly for predictability of earnings historically. Its spread of earnings estimates is small, as is the case with many large stocks within the Canadian financial services sector.

Sun Life, a diversified financial-services company with operations in Canada, the United States, the United Kingdom and Asia, published an excellent earnings report on Aug. 5. Its earnings surprise, which measures the percentage difference between actual and expected earnings for the latest reported quarter and also factors in earnings variability, is among the best in Canada currently.

As for its resilience in down markets, Sun Life's five-year historic normalized EPS growth rate is 16.6%, versus 12.2% for the sector. Its forward return on equity (ROE) is 13.2% and its forward reinvestment rate (the projected growth of its book value) is 7.9%, versus 9.2% and 4.5% respectively for its sector. For investors seeking dividends, SLF has an expected dividend yield of 3.5%, compared with a 3% sector median. These attractive metrics should attract an array of investors in Canadian equities: those looking for value, predictable growth and income.

Momentum-oriented investors may not intuitively follow large insurance companies, but they should give serious consideration to Sun Life as well, thanks again to its earnings surprise, its earnings-estimate revision from three months ago of 4.7 %, and its quarterly earnings momentum of 12.4%, versus the 1.1% median for the Canadian financial-services sector.

Transcontinental Inc. (TCL.A)

Printing and publishing company Transcontinental Inc. has an earnings history that is among the most predictable of all Canadian companies. There is a very high degree of agreement for TCL's forward earnings estimates, and much greater than for its peers in the industrials sector. The company's latest earnings report, which was released on Sept. 10, showed an earnings surprise of 24.1%. The stock has risen 20.8% in the year to date compared to a 5.5% decline for the S&P/TSX Composite Index.

As with Sun Life, Transcontinental is highly rated for value, growth and income investors seeking low volatility. The company's earnings estimate revision from three months ago is 8.5% and the stock-price change over three months is 36%. It also has an expected yield of 3.4%, compared with 1.9% for the sector median.

Facebook Twitter LinkedIn

About Author

Catherine Multon

Catherine Multon  Catherine Multon is a contributing writer for Morningstar Canada.

© Copyright 2022 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy