Looking for growth stocks with momentum

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What are we looking for?

Growth stocks. While investing in growth has fallen out of favour in recent years, it's still a valid approach to stock picking. We wanted to find Canadian securities that combine good growth numbers with "momentum" – a recent history of rising share prices.

How we did it

Craig McGee, senior consultant at Morningstar Canada, used the CPMS Canadian database to find stocks that had:

-a strong return on equity over the last four quarters;

-an upward revision to analysts' consensus earnings estimates over the past 90 days;

-a latest earnings surprise that was positive;

-a rising share price over the past year.

To make the final list of 15 stocks, a company had to have at least $250-million in market capitalization. To ensure adequate diversification, no more than three stocks from any one sector were included.

More about Morningstar

Morningstar Inc. provides independent investment research in North America, Europe, Australia and Asia.

Its investment 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.

What we found

Our final list features stocks you might have expected (Lululemon) and ones you might not have anticipated (Encana).

History shows that betting on growth can be highly profitable. To test the strategy, Mr. McGee looked at what would have happened if you had selected a 15-stock growth portfolio beginning in February, 1992, and reselected that portfolio every quarter until the end of June, 2012, using the criteria outlined above.

He found that the growth portfolio would have generated an average annual return of 27.9 per cent versus 8.4 per cent for the S&P/TSX Total Return Index over the same period.

Those returns would have been reduced by transaction costs and tax, but the track record does suggest that an affection for growth can be more rewarding than many investors realize.