What are we looking for?
A low-beta portfolio comprising stocks that exhibit strong price momentum.
The screen
Every quarter, we at CPMS conduct a backward-looking review and commentary of what happened during the latest calendar quarter in the North American equity markets from the quantitative (objective) perspective. During the analysis of the second quarter of 2016, we identified that one of the strongest quantitative factors rewarded by the market in that quarter was price momentum. With that in mind, I wanted to analyze an investment strategy focused solely on various price-momentum metrics, while minimizing the risk volatility of the overall portfolio.
I used CPMS to build a strategy that ranks stocks based on the best combination of:
- Percentage price change from month-end one, three, six and nine months ago;
- Percentage change in price from 12-month high.
Qualifying companies have a market float greater than the CPMS median (currently $300-million), and average monthly value traded of more than $3-million. The percentage change in price from their 12-month highs is less than 8 per cent (the smaller the better), and they have a five-year price beta (that is, based on risk levels over the past five years) versus the market index of less than 1.7. Beta is a measure of an asset's risk relative to the market; beta of less than one would indicate the stock is less volatile than the market in general.
More about Morningstar
Morningstar Research 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. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.
What we found
I used Morningstar CPMS to back-test the strategy from December, 1985, to July, 2016. During this process, 20 stocks were purchased and equally weighted. Stocks would be sold if they fell outside the top 50 per cent of the ranked universe. Over this period, the strategy produced an annualized total return of 17.8 per cent while the S&P/TSX composite total return index advanced 8.2 per cent. The overall beta on the portfolio is 0.7. The top 15 stocks that qualify today are listed in the accompanying table.
As always, investors are encouraged to conduct their own research before purchasing any of the investments listed here.
Julie Michaels, MBA, is a relationship manager for CPMS at Morningstar Research Inc.