What are we looking for?
Canadian momentum stocks trading at reasonable levels when compared with their historical valuations.
As Canadian equity markets continue their swift recovery from the lows of 2018, investors may be leery of purchasing companies that have run up on their valuations. This week, I use Morningstar CPMS to look for companies that have shown short-term price momentum, and are trading near their 10-year median historical valuations (measured across multiple metrics). To find companies like this, I first rank the largest 250 companies in Canada on the following metrics:
• Three-, six- and nine-month price change (six- and nine-month not shown);
• Five-year earnings-per-share deviation (a statistical measure showing how volatile a company’s earnings have been);
To qualify, companies must be trading at or below at least one of their 10-year median historical price-to-book, price-to-earnings, price-to-cash-flow or price-to-sales multiples (price-to-sales 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.
What we found
I used Morningstar CPMS to back test this strategy from May, 1992, to February, 2019. During this process, a maximum of 15 stocks were purchased and equally weighted with no more than four in a given economic sector. Once a month, stocks were sold if their rank fell below the top 35 per cent of the ranked universe or if all of the above historical-relative valuation metrics exceeded 30 per cent of their historical medians. When sold, the positions were replaced with the highest ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 12.9 per cent while the S&P/TSX Composite Total Return Index gained 8.6 per cent.
The stocks that qualify for purchase today are listed in the accompanying table. It is always recommended to speak to a financial adviser or investment professional before investing.
Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.