|
|||||
 |
|||||
|
|||||
|
The Globe 250 for 2025 The market is full of presents for investors and we’re pleased to highlight the best it has to offer with our Megastar ranking of the largest 250 stocks in Canada. We provide a bounty of data on each stock along with two star ratings that sum up their merit as value and momentum investments. Our team of Megastars combines the best of both worlds and builds on the achievements of last year’s team, which soared 51.1 per cent. Our star system takes a disciplined approach to the stock market based on the numbers. The idea is to push aside intuition or speculation about a company’s prospects and instead stick to quantitative factors that have been successful over the long term – and that we think are likely to continue to enrich investors. We weigh up each stock based on its appeal to value investors using four factors and then its attractiveness to momentum investors using four more factors. The Megastar team combines all eight factors in an effort to find the best bargain-stocks-on-the-mend the market has to offer. We highlight the largest 250 common stocks on the Toronto Stock Exchange by market capitalization that have at least 12 months of trading history because we want to stick with reasonably-sized companies that have enough data to rank fairly. We also try to skip over any company that is in the process of being purchased by others, because its circumstances are better assessed by merger arbitrageurs. We hope you enjoy our new team of Megastars and you can learn more about them, and our star system, below. Boxing Day Bargains Value investors are bargain hunters at heart. They gleefully peruse flyers each week to find the best deals on offer and revel during Boxing Day sales. It should come as no surprise that they take a similar approach to the stock market, where they want to buy lots of value for a low price. We start bargain hunting with the venerable price-to-earnings ratio (P/E). The idea being to look for stocks with low P/Es, which offer investors lots of profits at relatively low prices. It turns out that buying low-P/E stocks has generally been a profitable endeavour over many decades. The second measure has an even longer pedigree and it comes in the form of the price-to-book-value ratio (P/B). It compares a company’s market value to the amount of money that could be theoretically raised by selling its assets at their balance-sheet values and paying its debts. A low P/B suggests a company is selling at a modest price relative to its net worth. Low prices are grand, but business quality is also important, and return on equity (ROE) helps to measure how much a company is earning compared to the amount of money its shareholders have invested. Companies with higher ROEs are given more stars than those that don’t use their capital as efficiently. Finally, we like companies that generate excess cash and use it to buy back their own shares – particularly when prices are low. That’s why we’re keen on value stocks that have reduced their shares outstanding over the past four quarters. We award the most value stars to companies with the best combination of the four value factors. The top 10 per cent of candidates get a full five out of five stars and a spot in the five-star value portfolio. In backtests, the five-star value portfolio gained an average of 16.4 per cent annually over the 25 years to the end of November, 2024, if an equal-dollar amount was put into each stock and the portfolio rebalanced monthly. It gained an average of 16.1 per cent annually over the same period when rebalanced yearly. In comparison, the S&P/TSX Composite Index (a reasonable proxy for the Canadian stock market) gained an average of 7.8 per cent annually over the same period. (The raw data used herein comes from Bloomberg and all the returns include dividend reinvestment, but not fund fees, taxes, inflation, commissions and other trading costs.) Dashing Winners Momentum investors are disciplined trend-followers who jump on stocks that have fared well over the past several months with the hope they’ll continue to climb for another month or two. It’s a simple strategy that has a record of profitability in most of the world’s markets going back decades. While gainers tend to continue to run higher in the short term, the reverse also tends to be true with lagging stocks, which continue to fall before – hopefully – finding a bottom. We take a blended approach to momentum by measuring it over three different time periods. Stocks that have outperformed their peers over the past three, six and 12 months are awarded more momentum stars. The fourth momentum factor is a risk reduction measure. We reward stocks with low-to-moderate volatilities and avoid highly volatile stocks that often behave like lottery tickets. The four momentum measures are combined to award stars to each stock. The top 10 per cent of candidates get a full five out of five stars and a spot in the five-star momentum portfolio. In backtests, the five-star momentum portfolio gained an average of 16.3 per cent annually over the 25 years to the end of November, 2024, if an equal-dollar amount was put into each stock and the portfolio rebalanced monthly. It gained an average of 16.1 per cent annually when rebalanced yearly. In comparison, the market index gained an average of 7.8 per cent a year over the same period. The Megastar Team We combine all the value and momentum factors mentioned above to build the Megastar portfolio, which contains the top 20 stocks. We’re pleased to say the Megastar portfolio outperformed since our last update, with a gain of 51.1 per cent from Dec. 20, 2023, to Dec. 11, 2024, assuming an equal amount of money was invested in each stock without rebalancing over the period. At the same time, the market index trailed with a gain of 29 per cent. The strong returns compounded with those from the prior year and the Megastar portfolio advanced by 71.2 per cent from Dec. 1, 2022, to Dec. 11, 2024, assuming an equal-dollar amount of each stock was purchased when the team was reformed each year. The market index gained 30.3 per cent over the same period. We can also employ backtests to explore the Megastar portfolio’s track record. It gained an average of 15 per cent annually over the 25 years to the end of November, 2024, if an equal-dollar amount was put into each stock and the portfolio rebalanced monthly. It climbed by an average of 16.7 per cent annually over the same period when rebalanced yearly. Markets bearing gifts The Megastars and our star rankings offer a good starting point for further research, but you should understand each company and its industry in detail before investing. Be aware of the limitations of numbers-based methods such as ours, because other factors can also be important when investing. For instance, our rankings do not reflect the character of a company, its management or employees, which can help or – in unfortunate cases – hinder a business. Similarly, unexpected events from the political and global to the local can sideswipe the market and individual companies. It’s a big reason why investing in stocks is risky but it’s nearly impossible to avoid the market’s grinchy periods while generating strong long-term returns. We hope our portfolios continue to climb smartly but hasten to say that the market isn’t that predictable. Even in the best circumstances, we expect our results to be bumpy, individual stocks will disappoint and market crashes will occur. We would be pleased indeed to outperform the market index by an average of a few percentage points a year over the next few decades. (For the sake of disclosure, the author owns many of the stocks mentioned herein.) Take particular care with stocks that trade infrequently and those with very low share prices, because they may be difficult to buy or sell in a timely and cost-effective manner. But enjoy opening the market’s presents to see what they have to offer. After all, the purpose of our star system is to help you find a few stocks to put in your portfolio. Megastar Article: The 20 Megastars Spreadsheet: The Top 250 Value and Momentum Star Rankings [.xls] First published in the Globe and Mail, December 20, 2024. |
|||||
| |||||
| |||||
| Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More... | |||||
