What are we looking for?
U.S. airline and ground transportation companies with positive earnings momentum.
Although the most recent rally in crude oil prices may have some investors hoping that a bottom is in sight, others may feel that there will be more disappointment to come. The latter group may look to industries that benefit from the overall reduction in oil prices. Airlines, for example, have benefited through the reduction of input costs – fuel being the major one.
The screen
This week, I created a strategy that looks specifically at U.S. airlines and ground transportation companies and ranks them, according to the best combination of the following factors:
– quarterly earnings momentum (the latest four quarters of earnings compared with the same number a quarter ago);
– quarterly earnings surprise (the percentage difference between the firms' quarterly operating earnings and the consensus estimate for that quarter);
– forward price-to-earnings multiples.
Stocks were screened to remove names with market capitalization of less than $2-billion (U.S.).
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
I used CPMS to back-test this strategy from January, 1993, to December, 2014. During this process, 10 stocks were purchased and equally weighted. Stocks would be sold if they fell outside the top 50 per cent of the database.
Over this 21-year period the strategy produced an annualized return of 10.4 per cent, while the S&P 500 total return index returned 9.4 per cent. Although this result in itself isn't spectacular, it is worthwhile to note that over the trailing one-year period, the strategy returned 30.5 per cent, while the benchmark returned 13.7 per cent. Over the trailing three-year period the strategy returned 38.6 per cent, while the benchmark returned 20.4 per cent. Over all periods, only airlines and ground transportation companies were held in the portfolio. Stocks that qualify today are listed in the table.
Investors are always advised to conduct independent research before purchasing stocks listed here.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.