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What are we looking for?

Positive momentum stocks within the U.S. retail sector.

The screen

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With Monday’s news of Sears Holdings Corp. filing for bankruptcy, the future of the once dominant U.S. retailer has come into question. The retail market has changed drastically in the past couple of decades, with internet shopping being many consumers' preferred method of browsing and making purchases, in lieu of traditional bricks-and-mortar stores. These changes have allowed new businesses to prosper while old businesses that have failed to adapt – such as Sears – have slipped by the wayside.

Today’s strategy aims to find U.S. retail stocks, selected from the retail group in Morningstar’s consumer cyclical sector, that are poised for upward momentum. This strategy ranks stocks using the following factors:

  • Trailing return on equity – measured as the company’s trailing earnings relative to its book value, higher values are preferred;
  • Five-year sales growth – annualized metric of a company’s five-year sales, higher values preferred;
  • Quarterly earnings momentum – measured as the growth in the most recent trailing four quarters of earnings relative to the trailing four quarters of earnings lagged by one quarter, higher values preferred;
  • Quarterly earnings surprise – measure of the difference between actual and expected quarterly earnings, higher values preferred.

In order to qualify, stocks must have a trailing return on equity in the top two thirds of peers (today this value equates to 7.91 per cent or greater), three-year sales growth (annualized) in the top two thirds of peers (today this value equates to 0.89 per cent or greater), and lastly, five-year sales growth in the top two thirds of peers (today this value equates to 0.09 per cent or greater).

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, 1996, to September, 2018. During this process, a maximum of 15 stocks were purchased. Stocks were sold if the company’s three- or five-year sales growth fell into the bottom third of peers (today these values equate to minus 1.58 per cent and minus 1.94 per cent or below, respectively). 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 15.7 per cent while the S&P 500 Total Return Index advanced 8.5 per cent across the same period. Stocks that qualify for purchase into the strategy today are listed in the accompanying table. Not surprisingly, juggernaut Amazon.com Inc. topped our list, outranking its retail peers across several metrics.

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

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

15 U.S. retail stocks poised for upward momentum

1 Amazon.com Inc. AMZN-Q                                       872,378.8                                   1,788.61  61.8 0.0 18.8 27.5 27.3 31.0 73.6
2 Lululemon Athletica Inc. LULU-Q                                         19,023.0  143.71 133.6 0.0 28.0 16.0 16.3 26.9 11.3
3 Shoe Carnival Inc. SCVL-Q                                               621.4  38.62 105.8 0.8 12.8 10.5 8.6 11.6 24.7
4 Lowe's Companies Inc. LOW-N                                         85,159.9  105.36 31.8 1.8 73.2 13.1 13.5 1.6 11.5
5 Nordstrom Inc. JWN-N                                         10,365.1  61.49 55.1 2.4 57.6 9.2 9.5 4.7 9.9
6 O'Reilly Automotive Inc. ORLY-Q                                         27,354.4  339.54 61.0 0.0 199.3 13.0 14.2 1.9 10.1
7 Home Depot Inc. HD-N                                       220,212.3  192.47 16.1 2.1 450.6 10.9 11.6 2.6 10.1
8 Dillard's Inc. DDS-N                                            2,001.8  72.87 43.4 0.5 10.3 11.3 9.8 25.5 8.7
9 DSW Inc. DSW-N                                            2,244.2  27.95 46.0 3.6 15.6 7.8 7.7 13.5 15.6
10 Urban Outfitters Inc. URBN-Q                                            4,211.5  38.59 57.4 0.0 18.9 9.0 11.6 3.8 20.0
11 Ulta Beauty Inc. ULTA-Q                                         16,475.1  275.64 36.6 0.0 33.7 24.1 24.9 0.9 6.9
12 Tractor Supply Co. TSCO-Q                                         10,556.8  86.67 43.8 1.4 35.2 11.3 11.7 1.8 12.8
13 Zumiez Inc. ZUMZ-Q                                               581.3  22.78 29.1 0.0 10.9 12.2 11.2 8.5 14.9
14 American Eagle Outfitters Inc. AEO-N                                            3,772.6  21.27 63.4 2.6 21.1 7.4 5.8 8.0 11.7
15 Ross Stores Inc. ROST-Q                                         35,794.6  95.87 51.0 0.9 48.5 11.4 11.3 1.1 6.1

Morningstar Canada

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