What are we looking for?
U.S. stocks that have low expectations but can deliver some pleasant surprises.
More about today's screen
This is a U.S. version of a screen we did with Morningstar CPMS last week for Canadian stocks. We'll look for stocks that have low current-year earnings-growth expectations but rising earnings expectations for the current year.
As we said last week, often stocks with high growth expectations are priced for perfection. If the stocks ever miss those high expectations they are punished severely because valuations are so high.
This screen looks for the almost the opposite; stocks that are out of favour and cheap, but are showing signs of much improved prospects.
More about CPMS
CPMS is a Toronto-based equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 680 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.
What did we find out?
Jamie Hynes, senior consultant at CPMS, ran this screen through his company's back-test system. Stocks had to be members of the S&P 500 or S&P Mid-Cap 400. The screen looked for stocks with low - but rising - growth expectations. We included valuation information such as price to earnings and book value in the table for reference only (a grading of "A" is expensive, "E" is cheap). Valuation was not included in the actual screen.
CPMS's back-test system uses monthly data back to Dec. 31, 1993. Stocks were sold in the test when they fell to the bottom half of the universe. The strategy returned 13.1 per cent since inception, versus 8.4 per cent for the S&P 500 total-return index. Over the past year, it has returned 31.8 per cent, versus 22.6 per cent for the benchmark.
"Like we saw with the Canadian version, this strategy is very active (155 per cent average portfolio turnover)," Mr. Hynes said. "Volatility is also high."