Craig McGee is a senior consultant at Morningstar Canada.
What we were looking for
As markets continue to push forward in a period of slower growth, investors may have to look deeper to find potential outperformers. This week, we’ll look at the CPMS Canadian Earnings Momentum model, which has been one of our leading strategies so far this year.
The strategy emphasizes stocks with high earnings estimate revisions and quarterly earnings momentum. Importance is also placed on stocks that have above average earnings surprises and strong price momentum. The strategy holds up to 20 stocks in its simulated portfolio, with a maximum of five stocks in one industry group.
Specifically, the strategy ranks stocks out of the largest 250 names in the database based on the best combination of the following criteria:
- Revision of the upcoming year’s consensus earnings estimate over the past three months;
- Quarterly earnings momentum, the change in latest four quarters EPS versus one quarter ago;
- CPMS earnings surprise;
- Price momentum over the past year.
Out of the 18 current holdings in the portfolio, I’ve attached the 13 stocks that meet all criteria and also have had flat or positive earnings surprises for their most recent reported quarter.
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. 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
Year-to-date, the Earnings Momentum model is up 11.9 per cent versus 6.5 per cent for the S&P/TSX Composite Total Return Index. Since inception on Dec. 31, 1985, the model has posted an annualized return of 22.2 per cent vs. 8.5 per cent for the index.
CPMS Canadian Earnings Momentum model
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