What are we looking for?
Stocks that continue to qualify as momentum picks in volatile times.
The screen
This year was certainly a volatile period for Canadian equities, but for investors with a higher risk tolerance and ability to trade frequently, 2015 would have provided some good opportunities for capturing short-term market moves. Case in point, the CPMS Canadian Earnings Momentum was one of the top-performing strategies with a year-to-date total return of 3.8 per cent versus the minus-6.4-per-cent return for the S&P/TSX composite. This strategy tracks stocks with the best combination of these metrics:
- three-month earnings-per-share estimate revisions (a measure of analyst sentiment that compares the current consensus estimates against the same figure three months ago – positive revisions preferred);
- quarterly earnings momentum (latest four quarters of trailing earnings, compared against the same figure one quarter ago);
- nine- and 12-month price changes;
- the current price relative to the stock’s 12-month high (this strategy prefers stocks as close as possible to their 12-month highs);
- latest quarterly earnings surprise (which compares the company’s latest quarter of reported earnings against analysts’ expectations);
- The strategy only considers the largest 250 names in Canada (measured by market capitalization) and excludes unit trusts.
More about Morningstar
Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.
What we found
Morningstar CPMS has tracked the performance of the Canadian Earnings Momentum strategy since December, 1985. The investment methodology involves picking 20 stocks and equally weighting them with a maximum of five stocks a sector. Stocks are sold if they fall outside the top 30 per cent of the ranked universe, or if EPS consensus estimates (not shown) fall below zero. Once sold, CPMS replaces the position with a qualifying stock. Since December, 1985, the strategy has produced an annualized total return of 21.3 per cent while the S&P/TSX composite total return index has produced 8 per cent. Today's top 20 qualifying stocks are shown here.
Note that this is a high-turnover strategy that leverages short-term changes in stock price and analyst sentiment. As such, conservative investors are encouraged to use caution and consider the implications of investing in such a strategy before acting. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.