What are we looking for?
Profitable large-cap stocks on the move.
The screen
After a rocky start to the 2018 calendar year, the S&P/TSX Composite Total Return Index has made it back into the black over the past few months. With the second quarter now behind us, the year-to-date change on the index is sitting at roughly 1.9 per cent. However, that’s not to say that there weren’t some large movers over this past momentum-driven quarter. This week, I look for companies that have shown positive price momentum on an absolute basis, as well as relative to their sectors. To find these stocks, I ranked the largest 200 companies in Canada by market capitalization using the following methodology:
- Absolute percentage price change from month-end, three, six and 12 months ago (in this momentum driven strategy, higher figures are preferred);
- Percentage price change relative to the stocks’ sector from month-end three, six and 12 months ago (again, higher figures preferred);
- Latest reported return on equity;
To qualify, companies must have positive (greater than zero) figures across all of the above metrics.
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 110 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, 1993, to May, 2018. During this process, a maximum of 15 stocks were purchased and equally weighted with no more than four representing each economic sector. Once a month, stocks were sold if their rank fell below the top 50 per cent of the ranked universe, or if any of the above metrics turned negative. 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 21.2 per cent, while the S&P/TSX Composite Total Return Index gained 8 per cent.
Like most momentum-driven investment strategies, investors are cautioned on the turnover of this portfolio and accompanying trading costs. On average, the turnover of this 15-stock portfolio was 189 per cent. This implies that the portfolio completely changed positions almost twice within a year, on average.
The stocks that meet our requirements for purchase are listed in the table below. 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.