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Number Cruncher

Strong share price gains: Playing the momentum game Add to ...

What are we looking for?

Stocks with momentum. As simple-minded as it sounds, shares that are already rising have a tendency to keep on rising.

More on today’s screen

Craig McGee, senior consultant at Morningstar Canada, provided today’s screen, which is an adaptation of the strategy that powers the Morningstar Canada Momentum Index. The index uses 30 stocks; to keep our list to a manageable length, we’ll use only 20.

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Mr. McGee filtered the Canadian CPMS database for the stocks with the best combination of return on equity over the past year, high revisions to analysts’ estimates over the past 90 days, strong share price gains over both the past three and nine months, and positive earnings surprises. He also factored in the distance of each stock from its 12-month high: Stocks trading closest to their 12-month highs were favoured.

Mr. McGee insisted that each stock had to have average trading volume in the top third of the database, and limited any one sector to no more than five selections.

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

Mr. McGee found that a hypothetical investor who started a portfolio on Dec. 31, 1993, according to the criteria above, and kept it until Oct. 31, 2012, would have generated an annualized total return of 19.2 per cent, more than doubling the 8.1 per cent return of the S&P/TSX Composite Total Return Index over the same period.

This investor is assumed to have refreshed the portfolio every three months, selling when a stock fell in rank outside the top 40 per cent of the database, and replacing it with the most highly ranked alternative.

Of course, there’s no guarantee that what has worked in the past will continue to work. But the strong history of this approach does demonstrate that riding momentum is one promising approach to stock market profits.

Follow on Twitter: @IanMcGugan

 

Morningstar Canada Momentum Index

Rank Company Symbol ROE
1 Parkland Fuel Corp. PKI-T 26.1%
2 Agnico-Eagle Mines Ltd AEM-T 11.8%
3 ShawCor Ltd. SCL.A-T 15.3%
4 WestJet Airlines Ltd. WJA-T 16.0%
5 West Fraser Timber Co. WFT-T 4.9%
6 Freehold Royalties Ltd. FRU-T 16.4%
7 Encana Corp. ECA-T 10.1%
8 Stantec Inc. STN-T 18.1%
9 Coastal Energy Company CEN-T 54.6%
10 Rogers Communications RCI.B-T 46.3%

Morningstar Canada

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  • PKI-T
  • AEM-T
  • SCL.A-T
  • WJA-T
  • WFT-T
  • FRU-T
  • ECA-T
  • STN-T
  • CEN-T
  • RCI.B-T
  • RIM-T
  • SLF-T
  • FR-T
  • CSU-T
  • WTE-T
  • DOL-T
  • LLL-T
  • CM-T
  • IFC-T
  • AIM-T
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Live Discussion of ECA on StockTwits
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Live Discussion of STN on StockTwits
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Live Discussion of CEN on StockTwits
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Live Discussion of RCI.B on StockTwits
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Live Discussion of RIM on StockTwits
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Live Discussion of SLF on StockTwits
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Live Discussion of IFC on StockTwits
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Live Discussion of AIM on StockTwits
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