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

What are we looking for?

Companies that have grown fundamentally in the long term, and have appreciated in price in the short term.

The screen

Compared with the S&P 500, the S&P/TSX composite index really hasn’t done much of anything this year. Weak markets in February and a strong rally in May brings us to a year-to-date return of about 2 per cent. However, this is not to say that there is no momentum in the Canadian markets. This week, I look for momentum-oriented names that have been growing their long-term fundamentals but have also exhibited recent positive price momentum. To look for these companies, I sort the largest 250 stocks in Canada according to the following:

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  • Five-year sales, earnings and cash flow growth (on average, by how much each of these line items has grown per year over the past five years);
  • Average return on equity over the past five years (recall that return on equity is the latest reported earnings per share and divide by the book value of equity, here we use an average over the last five years);
  • The price change month-to-date as well as from month-end three, six, nine and 12 months ago (table includes results for price change month-to-date, and from six and 12 months ago).

To qualify, stocks must be ranked in the top quartile of the universe after sorting on the above criteria.

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 April, 1995, to August, 2018. During this process, a maximum of 20 stocks were purchased and equally weighted with no more than five per economic sector. Once a month, stocks were sold if their rank fell below the top 35 per cent of the ranked universe or the stock price fell by more than 15 per cent over any of the aforementioned time frames. 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 17.2 per cent while the S&P/TSX total return index advanced 8.4 per cent. Year to date, the strategy has returned 9.6 per cent. The stocks that qualify for purchase today are listed in the accompanying table.

TSX-listed stocks showing strong fundamentals, short-term price gains

Rank Company Ticker Market Cap ($Mil) 5Y Sales Growth (%/Y) 5Y Cash Flow Growth (%/Y) 5Y EPS Growth (%/Y) 5Y Avg. ROE (%) MTD Price Chg. (%) Price Chg. from ME, 6M Ago (%) Price Chg. from ME, 12M Ago (%) Recent Price ($) Div. Yield (%)
1 Cargojet Inc. CJT-T 1,082.4 10.8 73.9 34.1 6.1 9.3 21.0 63.4 82.50 1.0
2 MTY Food Group Inc. MTY-T 1,623.6 29.2 28.4 16.0 18.1 6.7 28.0 32.0 64.53 0.9
3 Sierra Wireless Inc. SW-T 1,007.4 15.4 22.4 36.3 5.8 13.4 31.3 4.3 27.91 0.0
4 Air Canada AC-T 7,391.5 7.7 44.2 56.2 9,769.7 1.2 1.3 3.4 27.13 0.0
5 Canfor Pulp Products CFX-T 1,802.9 10.6 13.0 22.0 17.9 0.9 66.5 107.6 27.63 0.9
6 ATS Automation Tooling ATA-T 2,225.1 11.1 0.7 8.5 9.8 6.9 33.7 78.4 23.65 0.0
7 TFI International Inc. TFII-T 4,153.3 12.0 16.5 17.2 14.9 -1.8 43.7 47.9 47.58 1.8
8 Alimentation Couche-Tard ATD-B-T 37,238.9 10.7 24.3 24.4 23.0 5.6 14.4 16.0 66.00 0.6
9 Enghouse Systems Ltd. ENGH-T 2,203.9 14.9 19.4 19.2 16.1 0.8 18.9 56.7 81.05 0.9
10 Methanex Corp. MX-T 7,916.5 6.9 11.7 0.2 17.2 4.6 27.6 58.9 99.60 1.7
11 Alaris Royalty Corp. AD-T 733.2 7.2 3.6 10.3 9.5 6.5 22.6 -2.3 20.09 8.1
12 Domtar Corp. UFS-T 4,609.9 6.1 6.0 7.0 7.0 6.9 29.4 31.0 70.92 3.2
13 Ritchie Bros. Auctions RBA-T 5,298.7 14.8 19.1 12.6 16.0 -1.6 20.9 24.1 48.97 1.9
14 Open Text Corp. OTEX-T 13,314.9 18.6 19.2 16.9 21.8 -2.9 10.9 23.5 49.71 1.6
15 Rogers Communications RCI-B-T 35,146.3 3.3 3.6 1.8 30.4 1.0 18.6 6.1 68.27 2.8
16 CCL Industries Inc. CCL-B-T 11,133.0 26.3 28.3 33.4 20.6 -0.3 -3.7 3.8 62.65 0.8
17 Gildan Activewear GIL-T 8,269.0 14.3 16.7 14.8 17.7 3.3 6.8 1.9 39.73 1.5
18 West Fraser Timber Co. WFT-T 6,144.0 13.8 29.8 40.5 17.2 -0.5 0.6 19.6 86.11 0.9
19 Algonquin Power Corp. AQN-T 6,480.7 7.9 16.1 29.8 7.8 1.8 7.8 4.4 13.77 4.9
20 Thomson Reuters Corp. TRI-T 41,656.9 0.9 6.0 6.5 11.1 2.2 19.1 3.6 59.30 3.1

Source: Morningstar Canada

It is always recommended to speak to a financial adviser or investment professional before investing.

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