When value or growth investing fails to fetch sustained profits, it’s time to explore another, time-tested winning strategy: to simply bet on the frontrunner stocks that are getting ahead of others.
Translated, one of the most successful strategies today is to get in on momentum stocks at the right time.
At the core, momentum investing is buying high, selling higher. It is based on the idea that once a stock establishes a trend, it is more likely to continue in that direction than move against the drift.
Thus, this strategy calls for hitching a ride on an already fast-moving train, without fretting about valuations or growth prospects. But why does the momentum strategy work?
There is a simple reason to this. It works because we are humans!
There’s a whole laundry list of behavioral biases that most investors exhibit, and these emotional responses and mistakes are the very reason why momentum works. For instance, we all know of investors who are afraid to book losses, and hence hold onto losing stocks for too long, hoping that they will come back to their original prices. On the other hand, most investors sell their winners way too early.
Furthermore, investors initially tend to under-react to news, events or data releases. However, once things become clear, they tend to go with the herd and overreact, causing dramatic price reactions.
These behavioral issues open up a huge opportunity for momentum players to make profits. Basically, it’s a way to profit from the general human tendency to extrapolate current trends into the future.
Momentum investing is based on that gap in time that exists before the mean reversion occurs, i.e. before prices become rational again.
Obviously, the Momentum Anomaly strategy is quite tricky to implement, as detecting these trends is no child’s play. Momentum strategies have been known to be alpha-generative over long periods of time and across markets, and we have devised a strategy that will help investors to get in on these trades and make handsome gains.
We have created a screen that will help you to take advantage of both long-term price momentum and a short-term pullbackin price, which could help you get in at bargain prices.
Screening Parameters
Percentage Change Price (52 Weeks) = Top #300: This item selects the top 300 stocks with the best percentage price change over the last 52 weeks. This parameter ensures that we get stocks that have appreciated the most over the past one year.
Percentage Change in Price (1 Week) = Bottom #150: From the above 300 stocks, we then choose those that are also among the 150 worst performers over a short one-week period.
Zacks Rank 1: No matter whether the market conditions are good or bad, stocks with a Zacks Rank #1 (Strong Buy) have a proven history of outperformance.
Momentum Style Score of B or better: A top Momentum Style Score knocks out a lot of the screening process as it takes into account several factors including volume change and performance relative to its peers. It indicates when the timing is the best to grab a stock and take advantage of its momentum with the highest probability of success. Stocks with a Momentum Style Score of 'A' or 'B,' when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) handily outperform other stocks.
Current Price greater than 5: The stocks must all be trading at a minimum of $5 or higher.
Market Capitalization = Top #3000: We have chosen stocks that are among the top 3,000 in terms of market value to make sure that our stocks have strong liquidity.
Average 20 Day Volume greater than 100,000: A substantial trading volume ensures that these stocks are easily tradable.
The above criteria narrowed down the universe of over 7,700 stocks to just 9. Here are the top 5 stocks that made it through our screen:
Weight Watchers International, Inc. WTW, which offers weight management services worldwide, has gained about 117% over the past one year, and also has a Momentum Style Score of ‘B’.
Acuity Brands, Inc. AYI designs, produces, and distributes various lighting solutions and services for an extensive range of applications across industries. The stock has climbed nearly 30% in the past one year, and carries a Momentum Style Score of ‘A’.
Core-Mark Holding Company, Inc. CORE markets fresh and broad-line supply solutions to the convenience retail industry. The stock has appreciated over 53% in the past one year, and boasts a Momentum Style Score of ‘B’.
Spark Energy, Inc. SPKE operates as an independent retail energy services company in the U.S. The stock has gone up by about 99% over the past one year, and sports a Momentum Style Score of ‘A’.
Trinseo SA TSE manufactures and markets synthetic rubber, latex, and plastic products. The stock has appreciated over 54% in the past one year, and boasts a Momentum Style Score of ‘A’.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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