What are we looking for?
Stocks that are in a "pre-uptrend" coupled with a growing return on equity (ROE). A pre-uptrend is a term we use that shows stocks that may be poised to move higher.
My colleague Rob Belanger and I started with North American companies over $500-million in market capitalization.
We then looked at moving averages, which are technical indicators that smooth the price data to form a trend-following pattern. They do not predict price direction, but rather define the current direction with a lag. (They lag because they are based on past prices.)
Stock prices are in a pre-uptrend when the share price is greater than the 200-day moving average, which in turn is greater than the 20-day moving average. What this indicates is that the higher share price will eventually pull the 20-day moving average up so that it crosses the 200-day moving average. That phenomenon is called the "golden cross," which is a very bullish technical pattern. All 20 companies in this list are in a pre-uptrend.
ROE measures a corporation's profitability by revealing how much profit a company has generated with the money shareholders have invested. We have shown companies with a minimum 15-per-cent growth in the ROE in the past 12 months, and we have also shown the three-year average.
Our reasoning here is to find those companies considered to be in a pre-uptrend with – ideally – last year's ROE growing faster than the three-year average.
What did we find?
Coastal Energy is a Canadian oil and gas exploration and development company located primarily in Thailand. The 20-day moving average is only 13 cents away from the golden cross, and the 12-month ROE is much greater than the three-year average.
CH Robinson is one of the largest logistic companies in the United States with operations around the world. It also shows the 12-month ROE higher than the three-year average.
Foot Locker and Kronos Worldwide, a producer of titanium dioxide pigments, both score well in the ROE category.
Besides Coastal Energy, seven other Canadian companies made the list, including ShawCor, Black Diamond, Northwest Health, Potash Corp. of Saskatchewan, TD Bank, CIBC and BMTC Group.
Many investors look exclusively at fundamental ratios, and still others look solely at technical indicators. It is imperative that investors use all the tools at their disposal in their research.