Canadian stocks with strong earnings and price momentum

The Globe and Mail

What are we looking for?

Momentum. Academic research indicates that stocks that have been going up tend to keep on going up – at least for a little while. In light of the rocky turn that markets have taken, we thought it would be interesting to look at companies that have powered ahead in recent months.

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More about today’s screen

Craig McGee, senior consultant at CPMS Morningstar Canada, created today’s offering.

He filtered the CPMS database of Canadian companies to find the 250 largest equities based on market capitalization. He then looked for firms that have:

-high earnings estimate revisions;

-strong momentum in growing quarterly earnings;

-positive earnings surprises;

-increases in stock prices.

Since its inception in 1986, the CPMS momentum model has generated an annualized return of 21.8 per cent compared with 8.3 per cent for the TSX composite total return index. So far this quarter, the model has held up well. It has produced a total return of 4.6 per cent against a loss of 5.4 per cent for the S&P/TSX composite total return index.

More about CPMS

CPMS, a division of Morningstar Canada, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers through software and Web-based tools. It covers more than 700 Canadian and 2,200 U.S. stocks, and adjusts for unusual accounting items in each company’s quarterly results to make sure screens can perform correctly.

What did we find?

A hodge-podge of companies that have done well recently but share few other traits in common. At the top of our list is dollar-store retailer Dollarama, which has prospered by catering to Canadians’ growing thriftiness; further down the roll call is Canadian Pacific Railway, which has seen its stock surge in tandem with a fierce boardroom battle; also making the grade is Lululemon, flogger of high end yoga wear.

As with all strategies of this type, the key is realizing that momentum persists but doesn’t endure: A stock that has been shooting upward is likely to continue its trajectory for a while, but often falls back to earth over a longer period. By all means, peruse this list for potential buys. Don’t assume, though, that all the companies listed here will continue their success over the long haul.

Notes to table

Grades relative to 728 stocks in the CPMS Cdn. database (A = best; E = worst). SOURCE: CPMS Canada