What are we looking for?
We'll take a look at CPMS's Momentum Portfolio today.
It isn't for the faint of heart. It requires a lot of trading, but its results over the long-term are the strongest amongst the portfolios that CPMS tracks.
The screen focuses on the following criteria: Earnings estimates that are being revised higher, positive earnings surprises versus analyst expectations, growing earnings and short-term price momentum.
What is CPMS?
Each Tuesday we do a screen with CPMS, which is a Toronto-based equity research and portfolio analysis firm owned by Morningstar Canada. CPMS maintains a database of about 660 of the largest and more liquid Canadian stocks, plus another 2,100 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company's quarterly results to make sure screens can perform correctly.
How has the screen performed in the past?
The Momentum Portfolio has returned 13.4 per cent so far this quarter as of Friday's close, compared with 5.1 per cent for the S&P/TSX total return index, says Jamie Hynes, senior consultant at CPMS. Since CPMS began tracking the portfolio in 1985, it has returned 21 per cent annualized, versus 9 per cent for the total return index.
Investors should be prepared for volatility, however, if they want to follow this strategy. The list can change quickly: The portfolio can turn over 200 per cent in a year and can contain volatile names. It can also go through periods when it underperforms, such as the last three years when it has lost 13.7 per cent annualized, versus a loss of 1.7 per cent annualized for the S&P/TSX total return index.
For today's screen, Mr. Hynes suggested an added twist to mine for hidden, small-cap gems, which is to limit it to names that are outside the S&P/TSX composite. To make sure the names are still liquid, the screen also is limited to stocks that have traded more than $1-million daily on average over the last three months.
Some names on this list have been hot performers this year, but that shouldn't lead investors to think that they can't go higher.
"The list should certainly be approached with caution, but as counter-intuitive as it may seem, the model is designed to reward strong trailing performance," Mr. Hynes said. "Our analysis over the years has shown that stocks with strong price momentum tend to keep rising when combined with short-term earnings strength as measured by earnings surprise, estimate revisions and earnings growth."