WHAT ARE WE LOOKING FOR?
Today we're looking for stocks with momentum. In other words, they're firing on all cylinders, both from an earnings and share price standpoint.
We'll use the “Momentum Model” developed by CPMS, an equity research and portfolio analysis firm owned by Morningstar Canada. Since CPMS's inception in 1985, the Momentum Model has generated an annualized return of 22 per cent, making it the firm's top-performing model portfolio.
The strategy isn't suitable for everyone. The model selects a lot of volatile small-cap stocks, and the portfolio turnover averages about 200 per cent a year.
So buy-and-hold investors should look elsewhere. According to CPMS, the performance data are after commissions of seven cents a share on trades.
THE CRITERIA
The Momentum Model looks for stocks with:
- Upward estimate revisions
- Positive earnings surprises versus analyst expectations
- Growing earnings
- Short-term price momentum
The portfolio is reviewed daily, and stocks that no longer meet the criteria are sold, and new stocks are added.
HOW IS IT FARING LATELY?
The model portfolio is down about 5 per cent year-to-date, proving that no strategy works all the time.
“After outperforming the S&P/TSX composite for five straight months ending in January, the model has run into a few speed bumps in February – namely Sierra Wireless and Cinram,” said Jamie Hynes, senior account manager with CPMS.
Sierra Wireless came out with a disappointing earnings report, and DVD maker Cinram received notice that Warner Home Video was terminating its contract. Both stocks plunged, and were subsequently removed from the portfolio.
“Needless to say, this really highlights the model's volatility,” Mr. Hynes said.
TODAY'S SCREEN
The table presents stocks that currently make the model's “buy” list. Given the model's outsized gains over the years and its rocky start in 2010, it's worth remembering that past results are no guarantee of future returns.
Do your own research before investing in any security, and be mindful of the risks inherent in smaller stocks.
You can find more information about CPMS's model portfolios at cpms.com
