What are we looking for?
Momentum – this time, with an American accent.
Momentum is important because stocks that are going up have a tendency to keep on going up, at least for a while. Last week we looked for Canadian stocks on an uptrend; this week we’ll search for their U.S. counterparts.
More on today’s screen
Craig McGee, senior consultant at CPMS, a division of Morningstar Canada, constructed the screen. He looked for rising stocks accompanied by improving expectations.
To make the list, a stock had to be:
– among the 1,000 largest stocks in the U.S. market, based upon market capitalization;
– among the 25 stocks in that group with the best combination of one-year total return, upward revisions in earnings estimates over the past 90 days, and positive earnings surprises, as calculated by CPMS.
More about CPMS
CPMS provides quantitative North American equity research and portfolio analysis to primarily institutional clients. It covers more than 700 Canadian and 2,200 U.S. stocks, and spends a great deal of time adjusting for unusual accounting items in each company’s quarterly results to make sure screens can perform correctly.
What we learned
A momentum approach may lead to enhanced performance, but the twists in the road can be deadly.
Mr. McGee tested how the particular momentum strategy outlined above would have performed over the past 18 years. He assumed an equally weighted 25-stock portfolio that was refreshed every three months.
He found that the approach would have generated an annualized return of 10.6 per cent since the start of 1994, substantially ahead of the 8.0-per-cent return for the S&P 500 Total Return Index over the same period.
Note, though, that transaction costs weren’t included in the calculations. With the portfolio’s holdings turning over almost three times every year on average, the expenses involved in constantly buying and selling stocks would have eaten into this strategy’s performance.
Mr. McGee cautions, too, that the approach would have required a tremendous amount of discipline to follow in real life. From March, 2000, to December, 2002, the portfolio lost 67 per cent of its value. From June, 2008, to February, 2009, the portfolio lost 55 per cent of its value. Either downturn would have left many momentum riders looking for a new strategy.
Note from Table
Grades assigned (A+, B-, etc.) are relative to 2,291 securities in the CPMS US database.