What are we looking for?
Canadian momentum names on the rise.
The screen
In 2016, one of the best-performing Morningstar CPMS model portfolios was the Canadian Momentum strategy. Certainly not a surprise to most, as we know that most of the returns in 2016 were driven by rallies in the materials and energy sectors, which often produce momentum-driven equity markets. For those who believe this momentum will continue into 2017 (and are able to handle the short-term volatility of such a strategy), perhaps a reminder of how this model works might be of benefit. The CPMS Canadian Momentum model ranks stocks on the following factors:
- Three-month estimate revision (today’s consensus estimate for earnings per share [EPS], versus what it was three months ago);
- Earnings surprise (latest reported EPS versus the consensus estimate just prior to the company report);
- Quarterly earnings momentum (latest four quarters of reported EPS versus the same figure one quarter ago);
- Three- and six-month price changes.
To qualify, stocks must have an average monthly trading volume greater than $1-million (not shown).
More about Morningstar
Morningstar Research 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 referred to Morningstar CPMS to track the performance of this strategy from December, 1985, to December, 2016. The model holds a maximum of 25 stocks in an equally weighted portfolio. Stocks are sold if their rank falls below 125 (today, there are roughly 720 companies in the Canadian CPMS universe). Over this period, the strategy produced an annualized total return of 18 per cent while the S&P/TSX composite total return index advanced 8.4 per cent.
In calendar year 2016, the strategy produced 23.7 per cent, while the S&P/TSX produced 21.1 per cent. The top 20 stocks that qualify for purchase today are listed in the accompanying table. It is worthwhile to note that the momentum portfolio is suited for short-term active investors who are able to weather substantial volatility and trading.
As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.