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What are we looking for?

U.S. momentum names.

The screen

As the Canadian equity markets continue to worry about the uncertainty of oil prices, the U.S. market (being a much larger, diverse economy with rising interest rates and a strong dollar) seems to be rewarding those who have been following momentum stocks. In fact, one of the best performing CPMS strategies year to date is the U.S. Price Momentum strategy, which looks for stocks with positive analyst sentiment (in the form of earnings per share estimates), and positive market movement in the short and medium term. This week, I look at a modified version of the CPMS U.S. Price Momentum strategy, which ranks stocks on the following factors:

  • Number of analysts that have revised their EPS estimates upward versus downward over the past 90, 60, and 30 days (calculated as the number of analysts that revise upward minus the number that revise downward, divided by the total number of analysts);
  • Price changes relative to month-end three, six and nine months ago.

Qualifying companies have at least five analysts actively covering the stock, a market cap of at least $500-million and a daily dollar trading volume of at least $2-million (averaged over three months). Companies with a limited partnership structure were also excluded from this screen.

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 used CPMS to back-test the strategy from February, 1994, to August, 2015. During this process, 20 stocks were purchased and equally weighted. Stocks would be sold if they fell outside the top 30 per cent of the ranked universe. Over this period the strategy produced an annualized total return of 18.5 per cent while the S&P 500 total return index produced 9 per cent. The top 20 qualifying stocks today are listed in the table. It is worthwhile to mention that this particular momentum-based strategy is generally targeted toward short term investors with above average risk tolerances.

As always, investors are advised to conduct their own independent research before purchasing shares in the companies shown.

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

U.S. momentum stocks