Craig McGee is a senior consultant at Morningstar Canada.
What we are looking for
Top-quality U.S. large-cap stocks.
The screen
Using CPMS, I created a composite score by equally weighing four different investment strategies into a combined rank, then looked for stocks that made it into the top 20 among S&P 500 constituents.
These are the four styles analyzed:
- Dividend growth: Less volatile companies with higher yields and strong growth of dividends and earnings
- Earnings momentum: Companies with strong short– and long-term earnings growth with increasing analyst expectations
- Price momentum: Companies with strong short- and long-term price momentum
- Valuation: Companies with lower price-to-earnings and price-to-cash flow ratios
By finding companies that could fit into a number of different styles, investors may benefit from an added level of diversification.
More about Morningstar
Morningstar 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.
What we found
To help test each strategy's effectiveness, I reviewed the CPMS model portfolios which are being tracked daily. Each day, ranks get recalculated for each strategy, and any position that deteriorates based on the fundamental criteria would be replaced.
Here is how each portfolio has fared on a total return basis, annualized, since Dec. 31, 1993: Dividend growth – 12.8 per cent; earnings momentum – 17.3 per cent; price momentum – 17.3 per cent; and valuation – 18.0 per cent. These compare with S&P 500's annualized total return of 9.2 per cent.