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What are we looking for?

Today's screen looks for stocks that score high on momentum. In other words, they've got the wind at their back.

We'll use the "Momentum Model" developed by CPMS, an equity research and portfolio analysis firm owned by Morningstar Canada. Since CPMS's inception in 1985, the model has generated an annualized return of 21.9 per cent, compared with an 8.4-per-cent gain for the S&P/TSX.

But be warned: This strategy is not for the squeamish. The model selects plenty of volatile small-cap stocks, and the portfolio turnover averages about 200 per cent a year. So buy-and-hold investors need not apply. According to CPMS, the performance data are after commissions of seven cents a share on trades.

The criteria

The Momentum Model looks for stocks with:

  • Upward estimate revisions
  • Positive earnings surprises versus analyst expectations
  • Growing earnings
  • Short-term price momentum

The portfolio is reviewed on a daily basis, and stocks that no longer meet the criteria are sold, and new stocks are added. "It's very high turnover, and it gets down into some of those more microcap names," says Jamie Hynes, senior account manager with CPMS.

The model was trailing the S&P/TSX earlier this year, but it has outperformed the index in the fourth quarter. "Small caps generally outperform large caps for an extended period of time following an economic downturn as investors' risk appetites increase," Mr. Hynes says.

The results

The table presents stocks that currently make the model's "buy" list. Given the model's outsized gains over the years, it's worth remembering that past results are no guarantee of future returns. Do your own research before investing in any security, and be mindful of the risks inherent in smaller stocks.

You can find more information about CPMS's model portfolios at