What are we looking for?
U.S. stocks that are positioned to do well over the next six months.
How we did it
Craig McGee, senior consultant at CPMS Morningstar Canada dug into market data back to 1993 to find factors that tend to drive high performance in the fourth quarter of the year and the first quarter of the next year. He discovered that the best performing stocks in these quarters tend to possess a mix of momentum, value and growth attributes, including:
-A high earnings yield (earnings per share divided by share price, using the consensus earnings estimate for the upcoming year);
-A high percentage change in the latest quarter’s earnings compared to the same quarter a year before;
-A high three-year “alpha” (the stock’s excess risk-adjusted return versus the S&P/TSX Composite; in other words, how much better the stock performed than one would expect given its risk characteristics);
-A strong change over the past three months in the average price over the preceding six months (this is called three-month price momentum).
Mr. McGee looked for stocks with these characteristics in the S&P 500 (which tracks large-capitalization U.S. stocks), S&P 400 (a mid-cap index) and S&P 600 (small cap). He allowed no more than five stocks from any one sector. The accompanying table shows the 25 stocks that ranked most highly on his scoring system, subject to the above restrictions.
More about Morningstar
Morningstar 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.
What we found
Mr. McGee back-tested this strategy from December, 1993, until August, 2013, assuming the portfolio was refreshed every three months. He found that it would have generated an annualized total return of 15.1 per cent versus 8.7 per cent for the S&P 500 Total Return Index.
The usual caveat applies: Past performance is no guarantee of future success. Do your own research before buying any of the stocks listed here.
U.S. stocks combining momentum, value and growth
|2||Micron Technology Inc.||MU-Q||18,141.12|
|3||Methode Electronics Inc.||MEI-N||1,043.22|
|4||Arctic Cat Inc.||ACAT-Q||767.58|
|5||Sanderson Farms Inc.||SAFM-Q||1,501.41|
|6||KapStone Paper & Pkg||KS-N||2,040.40|
|7||Monarch Casino & Resort||MCRI-Q||310.72|
|8||Delta Air Lines Inc.||DAL-N||20,239.05|
|9||Green Mountain Coffee||GMCR-Q||11,355.18|
|10||Carrizo Oil & Gas, Inc.||CRZO-Q||1,524.01|
Source: Morningstar Canada
Qtr vs Qtr
|2||Micron Technology Inc.||MU-Q||18,141.12||10.88%||123.19%||31.77%||1.03%|
|3||Methode Electronics Inc.||MEI-N||1,043.22||5.18%||260.00%||35.32%||1.91%|
|4||Arctic Cat Inc.||ACAT-Q||767.58||5.91%||185.71%||19.33%||3.16%|
|5||Sanderson Farms Inc.||SAFM-Q||1,501.41||10.07%||136.00%||14.91%||1.69%|
|6||KapStone Paper & Pkg||KS-N||2,040.40||9.81%||12.31%||31.82%||2.54%|
|7||Monarch Casino & Resort||MCRI-Q||310.72||6.06%||105.56%||37.11%||1.22%|
|8||Delta Air Lines Inc.||DAL-N||20,239.05||12.93%||42.03%||19.11%||1.48%|
|9||Green Mountain Coffee||GMCR-Q||11,355.18||5.00%||57.19%||27.08%||4.62%|
|10||Carrizo Oil & Gas, Inc.||CRZO-Q||1,524.01||9.91%||221.22%||20.89%||-0.46%|
|11||Lithia Motors Inc.||LAD-N||1,885.69||5.89%||42.35%||24.18%||3.76%|
|13||Skechers USA Inc.||SKX-N||1,576.86||5.79%||360.00%||20.34%||1.20%|
|17||Capital One Financial||COF-N||40,236.33||9.91%||171.90%||9.60%||0.14%|
|18||Hornbeck Offshore Svcs.||HOS-N||2,069.28||7.58%||82.86%||17.21%||1.64%|
|20||StanCorp Fin'l Grp. Inc.||SFG-N||2,443.52||8.36%||162.75%||16.32%||-0.31%|
|22||Virtus Investment Partners||VRTS-Q||1,324.83||6.39%||73.02%||5.19%||3.88%|
|23||Horace Mann Educators||HMN-N||1,134.26||7.91%||143.75%||14.02%||-0.30%|