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What are we looking for?

A growth-stock strategy for U.S. stocks.

More about today's screen

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This is a continuation of a theme we've done the last few weeks, looking at picking stocks using sales growth.

For stocks within the S&P/TSX composite ( and the S&P 500 (, we found that stocks that grew revenues every year tended to outperform the market significantly. We learned that consistent growth over the long term is more important than strong short-term growth for stocks within the indexes.

Outside the S&P 500 can be a different story. Earlier we found that annually reselecting 50 stocks outside of the S&P 500 with the best five-year annualized sales growth also beat the market (

Today with the help of Morningstar CPMS, we'll revisit that strategy and try to refine it further. We'll pick a portfolio of stocks annually from outside the S&P 500 that have the best five-year annualized sales growth. We'll limit the portfolio every year to two stocks from each sector and we'll also pick only stocks that have positive analyst estimate revisions - that is, earnings estimates must be on the rise.

More about CPMS

CPMS is an 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 more than 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.

What did we find out?

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This portfolio strategy produced a stunning 20.1-per-cent total return annualized since the end of 1995 versus 7 per cent for the S&P 500. Few of the names in the portfolio currently will be recognizable to most Canadians, but the portfolio is on track for a good year with a 19-per-cent average return for the stocks for the year to date.

"It shows that forward-looking expectations are just as important to watch," said Craig McGee, a senior consultant at Morningstar CPMS. "Since analyst revisions can sometimes have significant effects on prices, focusing on companies with improving outlooks can add value to most strategies."

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