Sailing across the ocean can be a fun and relaxing experience until the weather turns turbulent. Under such circumstances, gaining mastery over the sea requires experience as well as an in-depth understanding of one's surroundings.
Likewise, at a time when the U.S. stock market is seeing a tumultuous run, investors need to cruise through the market tactically.
Volatility continues to fetter the stock market. Unprecedented oil price volatility, sluggish consumer outlook and foreign market volatility continue to cast their dark spell on the current skies. Then there’s everyone’s favorite economic guessing game: When will the Fed raise short-term interest rates? This again adds fresh bouts of instability every now and then.
We feel that in a market that is trending up or down so frequently, investors can consider employing a momentum strategy to add substantial returns to their portfolio. Momentum stocks typically outperform when the stock market is rising and underperform when it is falling.
The Momentum Sailor
Momentum investors basically employ an investing strategy that seeks to take advantage of market volatility. They take short-term positions in stocks that are scaling up and sell them as soon as they show signs of a downtrend, then moving the capital to a new position. The basic idea is that once a trend is established, it is more likely to continue in that direction than to move against the drift.
While riding the wave of market volatility, the most crucial factor for momentum sailors is to get their sails up when the timing is right.
However, this does not necessarily mean that momentum investing will get you into a beaten-down stock at the bottom, or get you out of a roaring name at the top. Instead, it helps you catch a lot of middles, which can actually increase the risk-adjusted returns of your portfolio.
Sailing on the Small-cap Boats
When talking about employing a momentum strategy in a volatile market, it is hard to ignore the small-cap stocks (stocks with a market cap of around $1 billion or below). Yes, it is true that such stocks have a deeper risk profile than established companies. However, the potential of small-caps against the current U.S. economic backdrop is something to reckon with.
Small-caps generate a much smaller fraction of their revenues from abroad as compared to most large-cap companies. At a time when oil price volatility and sustained strength in the U.S. dollar are distorting earnings for most large-cap companies, betting on small-cap stocks can actually be safer.
Moreover, considering the fact that these stocks are far more speculative in nature, they have a much higher potential for price appreciation. Thus, when you combine a momentum strategy with small-cap stocks, the likelihood of gains is exponential.
Let’s Set Sail
To embark on the expedition, we have picked stocks that are trading under $10 and have great momentum using our new style score system.
A favorable momentum style score indicates the suitable timing to enter a stock. Nothing is more frustrating than watching a fundamentally sound or inexpensive stock, simply remain frozen and not move higher, or even stall or go lower after a price increase. The Momentum component remedies these situations and provides the temperature gauge that indicates when to enter or exit.
Back-tested results show that stocks with Style Scores of ‘A’ or ‘B’, when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) handily outperform other stocks.
Flaunting a solid Zacks Rank and Momentum Style Score of ‘A’, coupled with an average price change of above 10% over the last four weeks, the following stocks are good bets for now.
3 Momentum Stocks Under $10
Rigel Pharmaceuticals, Inc. RIGL
Rigel Pharmaceuticals, with a current market cap of roughly $370 million, is a clinical-stage drug development company that discovers and develops novel, small-molecule drugs for the treatment of inflammatory diseases, cancer and viral diseases. Rigel is a part of the medical-drugs industry which is currently in the top 30% of our 260 plus industries.
Currently trading at $4.17 a share, this Zacks Rank #2 stock has added nearly 13.56% over the last four weeks.
Not only does the stock have an impressive short-term momentum, it has seen solid activity on the earnings estimate revision front as well. Over the past 30 days, estimates for the current year have narrowed from a loss of 87 cents to 66 cents a share, reflecting an improvement of 24%.
Exelixis Inc. EXEL
Exelixis is a player in the Medicine-Biomed/Genetic space, which is currently in the top 23% of our 260 plus industries.
The company has a market cap of around $610 million. Currently trading at $3.10 a share, this Zacks Rank #2 stock has rallied nearly 13.09% over the last four weeks and can be an intriguing choice for momentum investors right now.
Exelixis has several pipeline and regulatory updates lined up this year, which should drive further momentum. In fact, the company has also been enjoying solid earnings estimate revisions. Over the past month, current year estimates have narrowed from a loss of 88 cents to 86 cents per share.
Atlas Resource Partners, L.P. ARP
A player in the Oil Exploration & Production space, Atlas operates as an independent developer and producer of natural gas, crude oil, and natural gas liquids in the U.S. The company has a market cap of around $744 million.
Despite the catastrophic fall in oil prices, this Zacks Rank #2 stock has gained nearly 13.56% over the last one month and is currently priced at $8.72 a share. Atlas has impressive growth prospects and any bounce back in oil and natural gas prices would generate further momentum for this company.
Atlas has also been witnessing solid earnings estimate revision activity lately, which has helped boost the current year Zacks Consensus Estimate by 25.3% to a loss of 62 cents, over the past month.
So as the seas turn rough, it may be a good time to employ the momentum strategy and ride the high tide.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment