Which Stocks and ETFs are Safe and Secure per the Dispersion of Analyst EPS Estimates

As promised last week, today we review the stocks that look most or least attractive according to the degree of dispersion of professional analyst EPS estimates. The lower the dispersion between the highest and the lowest EPS estimate, the better; those are the most attractive stocks. We had previously done this in 2012 and the results two years later have turned out quite good as we showed last week.

The method
We use the same methods as in 2012. First, we gather a list of stocks by taking all the holdings of three popular Canadian equity ETFs with quite different strategies:

• the cap-weighted iShares S&P / TSX 60 Index ETF (TSX symbol: XIU), 
• the fundamental (accounting) factor weighted PowerShares FTSE RAFI Canadian Fundamental Index ETF (TSX: PXC) and 
• the low beta (market sensitivity) selected BMO Low Volatility Canadian Equity ETF (TSX: ZLB). 

Not only does this give us a reasonably complete list of leading stocks, it also allows us to compare the ETFs in terms of analyst EPS dispersion.

The second step is to find and calculate the percent difference between high and low EPS estimates for 2015 in Yahoo Finance - e.g. Royal Bank. For a few companies not available on Yahoo (pale yellow cells in the tables), we obtained the data in our broker BMO InvestorLine's website.

Third, we add various bits of data that show stability, consistency and attractiveness, or the opposite:

• number of years of profits (positive earnings) in the last five from Morningstar.ca; 
• profit surprise vs analyst estimate last quarter, return on equity, total stock return (dividends plus capital gains) for the trailing one- and five-years, price-to-earnings, price-to-book, all from Globe's WatchList;
• number of women directors, from our recent post;
• place in our 2012 post EPS dispersion list - low (L) EPS dispersion category; medium (M) dispersion category, or high (H) dispersion group.

The attractive lowest dispersion stocks - More reward than risk

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There is a preponderance of good green and a lot of consistency across the table amongst the stocks with the lowest dispersion between the highest and lowest EPS estimates.

• beta - volatility of stock price relative to the market average of 1.0 - is almost always low, and the worst stock, Finning International (TSX: FTT) has a beta (1.86) nowhere near the highest betas in the bottom group
• profit surprises, both positive and negative, are not very large, except for one company Valeant Pharma (TSX: VRX), which is a decided outlier on several other metrics as well
• profitability (ROE) is good across the board, as is consistency of profits and total market returns; P/E and P/B ratios seem restrained almost universally too
• women directors are more numerous on average - 2.9 per company - compared to the higher dispersion stocks
• half the lowest dispersion stocks are repeats from 2012

Middle EPS dispersion stocks - Potential reward but more risk too

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The rising range of EPS estimate dispersion, from 113% to 141% in this group, is accompanied by slightly less green and slightly more more cautious orange across the various indicators. There are higher average P/Es and fewer women directors per company.

Our surprise comparing this set of results to 2012 is that there seems to be much less differentiation from the top group. Beta seems about the same as the lowest dispersion stocks. There are not many cases of poor profitability (ROE) or inconsistent (5 yr history) profits.

A number of stocks moved down from the 2012 top group but not one moved up from the bottom group.

High EPS dispersion stocks - More risk than reward

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As in 2012, there is plenty of bad red and cautious orange and not much good green in the bottom group. Stocks where the high vs low EPS estimate spread exceeds about 150% look truly risky. There are many companies with volatile profits and negative market returns. Most companies are repeats from the 2012 bottom list. A handful have dropped into the bottom list from the middle but not one fell from the top list to the bottom. These companies also have a much lower average number of women directors.

Comparing the ETFs - BMO's ZLB is decidedly the least risky and most attractive

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ZLB wins by a long shot over XIU and PXC by holding a lot less of the bottom group with the highest EPS dispersion. Only 10% of its weight is in the bottom group vs around a quarter for both XIU and PXC. ZLB has an appreciably lower weight in the top group stocks but that doesn't matter. It is not surprising that its one-year total return of 26.9% far outstrips the gains of the other two ETFs given the poor overall track record of the bottom groups stocks.

Will that continue or will XIU and PXC experience a surge to catch up to or leap ahead of ZLB? It all depends on the future of the energy companies and miners, especially gold, whose stocks dominate the listings in the highest dispersion part of the table. XIU and PXC hold them, ZLB mostly doesn't. Who knows if the tide will turn, the professional analysts certainly don't agree as their EPS estimates demonstrate.

Bottom line: Meantime, the safe route is to focus on the top two groups or ETFs like ZLB.

Disclosure: This blogger owns shares of stock symbols REF.UN, BEI.UN, CUF.UN, REI.UN, RY, CNR, NA, NWC, CU, FTS, EMA, MRU, BNS, BMO, BCE, SJR.B, ACO.X, TD, HR.UN, TRP, IFC, EMP.A, POT, IMO, SU, FCR, TCK.B as well as the ZLB and PXC ETFs that own virtually all the stocks in the tables.

Disclaimer: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.