What are we looking for?
Today we're going to continue to explore how to crunch your way to a well-balanced portfolio.
We're relying on work done by CPMS - an equity research and portfolio analysis firm owned by Morningstar Canada - in setting up their Core 20 Model Portfolio.
The goal in the portfolio is to take some of the emotion out of investing and quantitatively select 20 stocks that provide sufficient diversification, some downside protection and hopefully a little more alpha than the benchmark index.
To do this, they actually cleave the portfolio in half and run a pair of screens to select stocks. Ten of the stocks fall into the "conservative" camp - we looked at how CPMS selects these names yesterday (see tgam.ca/cruncher). The other 10 stocks fall into what it calls the "aggressive" camp, and we're going to take a look at that screen today.
How does the screen work?
Momentum is the key factor in selecting the names that make up the aggressive stocks.
There are a few momentum measures that feed into the scoring system that drive the daily buy and sell decisions in the portfolio. CPMS looks for:
- Increasing forward earnings estimates
- Earnings momentum year over year
- Earnings surprises (strong results against expectations)
- Sustained price momentum over three, six, nine and 12 months
Within the scoring system devised by CPMS, earnings momentum is given slightly more weight than price momentum.
Companies do need to be expected to make money, at least 10 cents a share, in the current year to make it on to the "buy" list and if analyst estimates dip to break-even or lower, that's a "sell" sign for any stock in the portfolio.
To ensure some diversification, no more than three stocks can come from the same sector.
The universe of stocks is limited to the 200 largest stocks in Canada.
What did we find?
This is not a screen for the faint of heart. As Jamie Hynes, senior account manager with CPMS, put it in an e-mail, this half of the portfolio "provides the Core 20's octane in up markets, but it can be very active and volatile."
In addition to some big positive returns for the names here, you will see some negative numbers creeping in. In the case of Trican Well Service, you are looking at double digits to the downside over the past three months for one of your holdings. How did it make the list? It's a recent addition that made it based on earnings momentum, but like all the names here it is on a short leash.
In fact, the churn rate in this half of the portfolio is approximately 150 per cent a year against just 30 per cent in the conservative model, Mr. Hynes said.
When you put the returns from the aggressive 10 together with the returns from the conservative 10, you end up with a portfolio that's performing well at the moment. Year to date, the Core 20 portfolio is up 5.9 per cent, handily outperforming the 1.2-per-cent total return for the S&P/TSX composite index. Over the past year, it's better-than 30-per-cent total return is almost double that of the TSX. Its annualized return since Dec. 31, 1985, is 15.3 per cent, again well ahead of the benchmark.