Skip to main content
number cruncher

What are we looking for?

U.S. stocks that exhibit good value and momentum characteristics.

The screen

In last week's Number Cruncher, I looked at names in Canada that exhibit reasonable valuations but also show upward price and earnings momentum. This week I revisit this strategy for the U.S. market.

Recall that value stocks exhibit low price multiples but can be susceptible to the value trap when prices remain suppressed over time because of company-specific or sector conditions. Momentum stocks show positive price returns over the short term but are often highly sensitive to market movements.

We attempt to find the best combination of both types of metrics by ranking stocks based on a combination of these factors:

– price to trailing earnings;

– price to trailing cash flow;

– price to trailing sales;

– quarterly earnings momentum (the latest four quarters of reported earnings compared against the same number one quarter ago);

– estimate revisions from three months ago;

– price change from nine months ago.

Qualifying stocks have a price-to-earnings ratio less than 20.5 times, price-to-cash flow ratio less than 12.6 times and price-to-sales ratio less than 1.8 times. These limits represent the current median price multiples across all stocks in the U.S. CPMS database.

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 December, 1993, to March, 2015. During this process, 20 stocks were purchased and equally weighted with a maximum of five stocks per sector.

Stocks would be sold if they fell outside the top 30 per cent of the database or if the stock price dropped by more than 15 per cent over a one-month time frame. Over this period, the strategy produced an annualized total return of 21.6 per cent while the S&P 500 total return index returned 9.4 per cent. The top 20 qualifying stocks today are listed here.

As always, investors are advised to conduct their own independent research before purchasing stocks shown here.

Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.

U.S. stocks with value and momentum