What are we looking for?
Canadian-listed stocks with the greatest momentum.
Momentum investing is the concept of purchasing stocks that exhibit persistent and positive increases in price. During periods of extreme market downturns, positive momentum can be hard to find, but as we have seen recently, investors can look to momentum during market rebounds to find outsized returns.
Leveraging FactSet’s Alpha Testing engine and Quantitative Factor Library, we looked to understand the effects of momentum in the Canadian market historically and throughout the COVID-19 pandemic. We limited our universe to stocks with a market value of more than $500-million and a price of more than $4 to remove any penny stocks or illiquid names that would skew results. We then created a momentum score to understand which companies demonstrated the greatest momentum. The hypothesis is that names that score higher are more likely to outperform the broader market, especially during market rebounds.
In order to generate the momentum score, we used several factors. The 200-day moving average shows a company’s stock price average over the past 200 days. A company with a below-average price indicates a stock may be about to rise in order to return to its average. To understand this relationship, the moving average input looks at each asset’s price as a percentage above or below their average. Total returns shows how positive or negative a company’s returns have been over the past 63 trading days (i.e. three months), with more positive returns contributing to more positive momentum in the market. Finally, the oscillator level is a technical score used by traders; a low score represents an expectation that a stock price will increase, indicating a potential buying opportunity. Using a shorter time horizon (i.e. 21 days) helps to identify what securities are most attractive for purchase at the time of a monthly rebalance. FactSet’s momentum score aggregates all these factors into a single value.
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What we found
We analyzed the companies that scored highest according to our momentum score every month over the past 10 years and created an equally weighted portfolio. We then compared the performance of this momentum-centric portfolio against the S&P/TSX Composite Index to see whether this strategy performed well both over the long term and during short-term periods of volatility.
From May, 2010, through June, 2020, the concentrated high momentum portfolio had a total return of 105 per cent compared with 49 per cent for the S&P/TSX, beating the broad market by a substantial margin. Zooming in on the COVID-19 market from the end of February through June, the portfolio rebounded from market lows in March with an overall return of 14.8 per cent. The S&P/TSX lost 3.4 per cent during the same period.
Our momentum portfolio is heavily tilted toward natural resources and biopharmaceuticals as investors looked for safety in hard assets and a potential vaccine for COVID-19. However, the top three scoring names as of the end of June were Facedrive Inc., SunOpta Inc., and Aurora Cannabis Inc.
Ride-sharing platform Facedrive continued to stretch higher after announcing it would purchase assets from Foodora Canada in early May, which would include access to Foodora customers and more than 5,500 restaurant partners to bolster its expanding footprint.
Specialty food supplier SunOpta gained momentum after reporting better-than-expected first-quarter results, which management credited to a successful response to the COVID-19 pandemic. Shares have remained elevated since.
Aurora Cannabis is no stranger to large market moves and recently saw success after a positive earnings release and multiple analyst upgrades. Its shares rose substantially after the news and continue to exhibit large daily swings.
Over all, the portfolio results indicate that momentum investing could be a valuable approach, even during times of severe uncertainty. The 15 companies with the highest momentum scores at the end of June are shown in the table.
The information in this article is not investment advice. FactSet assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained above.
Andrew Cullivan, CFA, is the head of FactSet’s quantitative and risk specialty team in Canada.
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