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What are we looking for?

U.S. retail stocks with positive momentum.

The screen

The popularity of online shopping has surged in the past decade, driven by the ease and convenience of shopping at home. Traditional stores have had to become more creative in drawing shoppers to their brick and mortar outlets, with some being forced to close their doors because of declining profitability.

Today’s strategy searches for momentum stocks within the CPMS U.S. database, specifically within the Morningstar retail subsector, which today includes 86 names. This strategy ranks stocks using the following factors:

  • Trailing return on equity measures the company’s trailing earnings relative to its book value, higher values are preferred;
  • Five-year sales growth is an annualized percentage of a company’s five-year sales, higher values are preferred;
  • Quarterly earnings momentum measures the growth in the most recent four quarters of earnings compared with the trailing four quarters of earnings one quarter ago, higher values preferred;
  • Quarterly earnings surprise shows us the difference between actual and expected quarterly earnings, higher values are preferred.

In order to qualify, stocks must have a trailing return on equity in the top two-thirds of peers (today this value is 11.4 per cent or higher), three-year sales growth (annualized) in the top two-thirds of peers (today this is 4.9 per cent or higher), and five-year sales growth in the top two-thirds of peers (today this value is 3.5 per cent or higher).

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 120 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.

What we found

I used Morningstar CPMS to back-test this strategy from December, 1996, to July, 2019. During this process, a maximum of 15 stocks were purchased. Stocks were sold if the company’s three- or five-year sales growth fell into the bottom third of peers. When sold, the positions were replaced with the highest-ranked stock not already owned in the portfolio.

For this analysis, I’ve also included a 1-per-cent liquidity cost (implying that stocks are sold at 1-per-cent lower than their price and purchased at 1-per-cent higher) owing to the relatively small size of some of the stocks within this industry. Over this period, the strategy produced an annualized total return of 15 per cent (net of liquidity cost) while the S&P 500 Total Return Index returned 8.4 per cent across the same period. Stocks that qualify for purchase into the strategy today are listed in the accompanying table.

As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

U.S. retailers with sales and earnings momentum

RankCompanyTickerMkt. Cap. (US$ Mil.)Trailing ROE (%)3Y Sales Growth (%)5Y Sales Growth (%)Qtly. Earns. Surprise (%)Qtly. Earns. Momentum (%)Div. Yld. (%)Recent close (US$)12M Price Chg. (%)
1Alibaba Group HoldingBABA-N451,700.624.160.174.719.810.20.0174.60-0.2
2Medifast Inc.MED-N1,207.560.530.612.11.311.13.0101.49-55.6
3L Brands Inc.LB-N5,626.327,999.
4Hibbett Sports Inc.HIBB-Q270.912.310.910.47.927.70.015.15-26.3
5Signet Jewelers Ltd.SIG-N620.613.414.012.441.3-0.612.411.89-81.5
6AutoZone Inc.AZO-N26,779.0579,991.,091.7442.4
7Ulta Beauty Inc.ULTA-Q18,825.136.621.
8Home Depot Inc.HD-N224,073.31,144.510.511.
9Lululemon Athletica Inc.LULU-Q23,166.937.419.
10O'Reilly Automotive Inc.ORLY-Q29,200.3380.114.014.3-
11Qurate Retail Inc.QRTEA-Q4,971.014.416.46.731.
12Sally Beauty HoldingsSBH-N1,501.221,900.
13Best Buy Co. Inc.BBY-N17,486.046.611.
14Sotheby's Holdings Inc.BID-N2,712.926.316.410.6-
15Lowe's Companies Inc.LOW-N73,531.587.210.212.3-

Morningstar CPMS

Note: LB, AZO, HD and SBH have negative book values; we have used a minimum book value of 0.01 for these stocks, resulting in their extraordinarily high trailing ROE figures.

Emily Halverson-Duncan, CFA, is a director, CPMS sales at Morningstar Research Inc.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 17/05/24 4:00pm EDT.

SymbolName% changeLast
Alibaba Group Holding ADR
Medifast Inc
Hibbett Inc
Signet Jewelers Ltd
Ulta Beauty Inc
Home Depot
Lululemon Athletica
O'Reilly Automotive
Qurate Retail Inc Series A
Sally Beauty Holdings
Best Buy Company
Lowe's Companies

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