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Number Cruncher

Refining the hunt for U.S. growth stocks Add to ...

What are we looking for?

A growth-stock strategy for U.S. stocks.

More about today's screen

This is a continuation of a theme we've done the last few weeks, looking at picking stocks using sales growth.

For stocks within the S&P/TSX composite ( tgam.ca/CfT3) and the S&P 500 ( tgam.ca/CgfK), we found that stocks that grew revenues every year tended to outperform the market significantly. We learned that consistent growth over the long term is more important than strong short-term growth for stocks within the indexes.

More related to this story

Outside the S&P 500 can be a different story. Earlier we found that annually reselecting 50 stocks outside of the S&P 500 with the best five-year annualized sales growth also beat the market ( tgam.ca/CiAM).

Today with the help of Morningstar CPMS, we'll revisit that strategy and try to refine it further. We'll pick a portfolio of stocks annually from outside the S&P 500 that have the best five-year annualized sales growth. We'll limit the portfolio every year to two stocks from each sector and we'll also pick only stocks that have positive analyst estimate revisions - that is, earnings estimates must be on the rise.

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 more than 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?

This portfolio strategy produced a stunning 20.1-per-cent total return annualized since the end of 1995 versus 7 per cent for the S&P 500. Few of the names in the portfolio currently will be recognizable to most Canadians, but the portfolio is on track for a good year with a 19-per-cent average return for the stocks for the year to date.

"It shows that forward-looking expectations are just as important to watch," said Craig McGee, a senior consultant at Morningstar CPMS. "Since analyst revisions can sometimes have significant effects on prices, focusing on companies with improving outlooks can add value to most strategies."

Follow on Twitter: @ScottAdams_Edit

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