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Number Cruncher Strategy seeks momentum stocks that remain reasonably priced

What are we looking for?

Canadian momentum stocks trading at reasonable levels when compared with their historical valuations.

The screen

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);

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• 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.

Select TSX stocks showing short-term price momentum


RankCompanyTickerMarket Cap ($Mil)P/E Rel. to 10Yr MedianP/B Rel. to 10Yr MedianP/CF Rel. to 10Yr Median5Yr Deviation of EPS Price Chg from Month End, 3M Ago (%)Price Chg from Month End, 12M Ago (%)Recent Close ($)Div. Yield (%)
1Alacer Gold Corp. ASR-T 1,204.7 0.71.11.658.362.7100.04.100.0
2Bank of Nova ScotiaBNS-T 86,555.5 0.80.70.81.73.8-11.070.624.9
3Bank of MontrealBMO-T 64,555.4 0.90.90.82.613.43.9101.124.0
4Kirkland Lake Gold Ltd.KL-T 9,362.8 0.42.11.327.725.4123.544.630.4
5National Bank of CanadaNA-T 20,510.5 0.91.00.92.49.10.861.134.3
6CIBCCM-T 48,123.1 0.90.70.92.26.8-4.5108.605.2
7Telus Corp.T-T 29,310.4 1.01.01.12.87.97.948.834.5
8Magna International Inc. MG-T 20,818.7 0.70.90.72.23.0-12.063.833.1
9Wheaton Precious MetalWPM-T 14,916.4 1.60.91.412.726.027.933.571.4
10Corus EntertainmentCJR-B-T 1,234.8 0.60.50.810.424.4-2.15.924.1
11Hudbay Minerals Inc.HBM-T 2,487.3 0.90.90.560.547.44.49.520.2
12Dollarama Inc.DOL-T 11,127.3 0.7* 415.69170.82.88.9-32.335.350.5
13Badger Daylighting Ltd.BAD-T 1,448.4 1.01.21.021.324.455.740.121.4
14TransCanada Corp.TRP-T 56,129.6 0.81.11.05.624.914.260.874.9

Source: Morningstar CPMS

* DOL-T had an exuberantly high price-to-book because of its low or negative book value of equity. Here, we are relying on the other valuation metrics as our gauge.

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

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