What are we looking for?
Stocks with positive momentum sustained by fundamentals.
Extensive research indicates that stocks exhibiting strong price momentum, coupled with upward earnings-per-share revisions, have a greater likelihood of outperforming the broader market over time. This may be owing to the fact that sustained momentum often signals strengthening business fundamentals, growing investor confidence and supportive market conditions.
By focusing on these key factors, we aim to highlight companies whose strong earnings growth, positive analyst sentiment and robust financial health align with price appreciation. We think this intersection of technical and fundamental strength increases the probability of continued upside.
The screen
We screened U.S. stocks using the following criteria:
- CPMS score in the top 20th percentile – we rank the U.S. universe based on the three-year average return on capital (ROC) and the forward price-to-earnings ratio (forward P/E). This removes the bottom 80th percentile from our screen;
- market capitalization greater than US$1-billion;
- price return over three months and six months greater than 3 per cent and 6 per cent respectively;
- positive EPS revision over three months and six months;
- three-year annualized EPS growth greater than 7 per cent.
For informational purposes, we also added dividend yield.
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What we found
Companies with solid momentum
Pinterest Inc. PINS-N is a social media platform that enables users to discover and save ideas through images and videos. It boasts the highest short-term price momentum on our list, with a three-month return of 28.2 per cent. Its earnings outlook is improving, backed by a six-month EPS revision of 5 per cent, the third-highest in our screening. This contrasts with a six-month price increase of 21.3 per cent, the fifth-lowest in our screen, indicating potential for further price appreciation as earnings expectations continue to improve.
Expedia Group Inc. EXPE-Q is an online travel company that operates several travel booking platforms. Expedia exhibits mixed momentum, with a three-month return of 9.6 per cent but a strong six-month return of 45.2 per cent. The company’s standout feature is its solid EPS growth, with a three-year annualized growth of 61.7 per cent, the highest in our screen. Expedia also trades at the third-lowest valuation of our list, with a forward P/E of 13.9.
Lululemon Athletica Inc. LULU-Q is a leading athletic apparel brand renowned for its high-performance wear and loyal customer base. It maintains a well-balanced financial profile, ranking favourably in our screen owing to consistent price momentum, earnings revisions and profitability. The stock has demonstrated impressive momentum, delivering a six-month return of 41.3 per cent. Lululemon’s fundamentals remain solid, with a three-year EPS growth of 25.2 per cent and a three-year ROC of 39.8 per cent, reflecting efficient capital allocation. However, its valuation appears less appealing, with a forward P/E of 23.7, ranking lower than other candidates on our screen.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
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Anthony Ménard, CFA, is vice-president of data management at Inovestor.