What are we looking for?
Momentum names outside of the energy and materials sectors.
The screen
Of the 50 top performers in the S&P/TSX composite index over the trailing 30 days, 23 are in the energy sector, and eight are in the materials sector. Short-term momentum investors are likely watching closely, but may look to diversify away from these two sectors as views differ on where commodity prices are heading. This week's strategy focuses on names outside of commodities and energy with the best combination of the following metrics:
· Three-month earnings per share estimate revision (today's consensus estimate versus what it was three months ago)
· Quarterly earnings momentum (latest four quarters reported EPS versus the same figure lagged by one quarter)
· Current price compared to the trailing 12-month high (a figure of -1 per cent means that the stock is trading 1 per cent below its 12-month high, small negative numbers are preferred).
· Nine- and 12-month price changes
· Latest quarterly earnings surprise (latest reported EPS figure versus the consensus estimate prior to the company reporting).
To qualify, stocks must not be classified in the materials or energy sectors, and must have a market cap of $700-million (Canadian) or above.
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 CPMS to back-test the strategy from December, 1985, to September, 2016. During this process, a maximum of 10 stocks were purchased and equally weighted with a maximum of three stocks per sector (excluding energy and materials sectors). Stocks would be sold if they fell below the top 30 per cent of the universe, or if the stock reported a negative EPS. Over this period, the strategy produced an annualized total return of 23.2 per cent while the S&P/TSX composite total return index produced 8.2 per cent. The top 10 stocks that qualify for purchase today are listed in the table below.
As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.