What are we looking for?
Canadian stocks to avoid.
More about today's screen
We'll get help today from Morningstar CPMS, a Toronto-based equity research shop. CPMS put together a screen similar to the one we ran last week that looked for the best momentum stocks.
Today, we'll look for stocks that have the following negative momentum indicators:
- Low price relative to 52-week high (the lower the price the higher the ranking);
- Poor price change over the last three months;
- Poor price change over the last six months;
- Negative earnings surprises in the last quarter;
- Unattractive trends in three-month change in forward earnings estimates;
- Poor earnings growth (quarter over quarter)
More about CPMS
CPMS is an 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?
CPMS created a portfolio of the worst 20 Canadian momentum stocks by ranking each of the 676 names it follows according to all the criteria. Remember, we're looking for stocks with low momentum so an 'E' ranks higher than an 'A.'
The 20 names in this portfolio are 75-per-cent determined by price factors and earnings factors account for the remainder. Stocks are ranked monthly and replaced when they no longer rank in the top 20 per cent of the database.
Stocks with an earnings ranking of 'C+' or greater were excluded so that all names would have poor earnings momentum. CPMS also excluded stocks with market caps less than $100-million and stocks with low trading volumes.
Jamie Hynes, senior consultant with CPMS, tested the portfolio strategy going back 25 years and found that the portfolio has performed terribly (short sellers may want to take notice).
Going back to the end of 1985 he found that the portfolio has underperformed the S&P/TSX total return benchmark index by 21 percentage points annualized. In other words, it has fallen 12 per cent annualized versus a positive return of 9 per cent for the benchmark.
Mr. Hynes included average target prices for the stocks from analysts and noted that the median target price for this portfolio is 38 per cent above current stock prices. This doesn't mean, however, that the analysts are right.
"There are sure to be [some]bargains on this list that have nowhere to go but up, but history suggests that this is a very dangerous strategy," Mr. Hynes said.