Skip to main content
Access every election story that matters
Enjoy unlimited digital access
$1.99
per week for 24 weeks
Access every election story that matters
Enjoy unlimited digital access
$1.99
per week
for 24 weeks
// //

What are we looking for?

Canadian momentum-driven stocks with low market sensitivity.

The screen

Traditional momentum strategies are often associated with extremes – extreme ups and downs, extreme trading and extreme volatility. Typically, the investors of these types of strategies have a higher risk tolerance and are comfortable being active with their investing. While the long-term returns can be quite attractive, the accompanying risk level may make these strategies perceived by the average investor as too much to handle.

Today, I’m showcasing a strategy that incorporates some key momentum factors while placing a cap on each stock’s market sensitivity in hopes of reducing volatility on the downside. The hope here is to create a model that benefits from the upside of a momentum strategy while still having strong downside protection. This strategy ranks stocks using the following factors:

Story continues below advertisement

  • Quarterly earnings momentum (measures growth in the most recent four quarters of earnings relative to the same four quarters of earnings lagged by one month, higher values preferred);
  • Trailing return on equity relative to the industry median (a profitability metric, higher values preferred);
  • Quarterly earnings surprise (measures the difference between actual and expected quarterly earnings, higher values preferred);
  • Five-year annualized cash flow growth (a profitability metric, higher values preferred).

In order to qualify, stocks must have a value greater than or equal to zero for the first three metrics listed above. Stocks must also have both their one-day price change and month-to-date price change with values greater than or equal to zero. Five-year annualized cash flow growth is required to be in the top third of peers, which today has a value of 5.4 per cent or higher. Lastly, five-year beta (a measure of a company’s sensitivity relative to changes in the benchmark – here we use the S&P/TSX Composite Index) must be less than 1.1. Recall that a beta of one indicates the same level of sensitivity as the market, so putting a cap of 1.1 ensures a company’s sensitivity is not substantially higher than that of the relevant benchmark.

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 October, 2002, to November, 2020. During this process, a maximum of 15 stocks were purchased. Stocks were sold if the company’s one-day or month-to-date price dropped more than 15 per cent. 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 21.3 per cent, while the S&P/TSX Composite advanced 8.1 per cent on the same basis.

It’s also worth pointing out the strategy outperformed the S&P/TSX in 83 per cent of down markets (defined as quarters where the index posted negative returns). Stocks that qualify for purchase into the strategy today are listed in the accompanying table. Note also that only eight stocks met the criteria for inclusion.

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

Select TSX stocks

RankCompanyTickerMkt. Cap. ($ Mil.)Qtly. Earns. Mom. (%)Indust. Rel. ROE (%)Qtly. Earns. Surp. (%)5Y Ann. CF (%)1D Price Chg. (%)MTD Price Chg. (%)12M Price Chg. (%)5Y BetaDiv. Yld. (%)Recent Price ($)
1Centerra Gold Inc.CG-T4,078.841.522.928.28.62.18.833.50.91.513.79
2Torex Gold Res.TXG-T1,764.522.815.61.292.53.115.10.51.00.020.63
3Richards PackagingRPI-UN-T737.414.427.315.430.31.00.944.00.62.065.66
4Stella-Jones Inc.SJ-T3,024.913.910.137.68.60.51.920.00.71.345.03
5CCL Industries Inc.CCL-B-T10,501.76.413.138.414.10.82.76.30.71.258.80
6Open Text Corp.OTEX-T15,942.18.814.417.514.40.72.12.30.91.858.53
7Cascades Inc.CAS-T1,594.412.38.015.410.45.46.638.80.12.115.56
8Waterloo BrewingWBR-T182.519.213.40.010.31.83.248.30.82.05.19

Source: Morningstar CPMS

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

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies