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Canadian stocks for the momentum investor

What are we looking for?

Let's try to hitch a ride on the best Canadian momentum stocks.

More about today's screen

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Momentum stocks are defined as stocks that are already going up and likely to go higher.

We'll get help today from Morningstar CPMS, a Toronto-based equities research shop.

CPMS created a screen that ranks stocks according to:

- Price relative to 52-week high (the closer or higher the better)

- Price percentage change over the last three months

- Price percentage change over the last six months

- Earnings surprise versus expectations last quarter

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- Three-month change in earnings estimates

- Earnings growth (quarter over quarter)

- Minimum market float is $100-million

- Minimum average trading volume is a "D-" ranking to exclude the most illiquid stocks in the database.

More about CPMS

CPMS is a Toronto-based equity research and portfolio analysis firm owned by Morningstar Canada. It maintains a database of about 680 of the largest and more liquid Canadian stocks, plus another 2,100 U.S. stocks, and spends a lot of time adjusting for unusual accounting items in each company's quarterly results to make sure screens can perform correctly.

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What did we find out?

To create a portfolio of the top 20 Canadian momentum stocks, CPMS had to rank each of the 680 names it follows according to all the criteria. It was done by letting price factors determine 75 per cent of the ranking and earnings factors the other 25 per cent.

Names with an overall earnings ranking of "C+" or less were excluded to weed out ones with weaker profits.

Jamie Hynes, senior consultant with CPMS, tested the portfolio strategy going back 25 years. "Results are nothing short of spectacular," he said.

The strategy has an annualized return of 27 per cent over the past 25 years, versus 9 per cent for the benchmark S&P/TSX composite total return index. Over the past year, the strategy is up 33 per cent versus 25 per cent for the benchmark.

The strategy has produced a positive return in 22 of 25 years -- and also has beat the S&P/TSX benchmark in 22 of 25 years.

However, Mr. Hynes warns that this strategy isn't for everyone. It is very active, meaning a 20-stock portfolio requires about 52 buy and 52 sell transactions per year. He also ran the portfolio back-test without factoring in fees, and notes that these costs are likely to be significant. He also warns that volatility is high and that the names are often small caps.

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