When value or growth investing fails to fetch sustained profits, one should explore another time-tested winning strategy that simply bets on the frontrunner stocks. 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 behind 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 that momentum strategy works. For instance, there are investors who are anxious about booking losses and hence hold onto losing stocks for too long, hopeful of a rebound in the prices. On the other hand, a few investors sell their winners way too early.
Furthermore, investors initially tend to under-react to news, events or data releases. However, once things gain clarity, they tend to go with the flow and overreact, causing dramatic price reactions.
These behavioral problems extend trends, and thus open up huge opportunities for momentum players. So basically, it’s a way to profit from the general human tendency to extrapolate current trends into the future.
Momentum investing is thus based on that gap in time that exists before the mean reversion occurs, i.e. before prices become rational again.
Momentum strategies have been known to be alpha-generative over a long period of time and across markets. So obviously, this strategy is quite tricky to implement, as detecting these trends is no child’s play.
Here, we have created a strategy that will help investors get in on these fast movers and make handsome gains. Our screen will help you benefit from both long-term price momentum and a short-term pullback in price, which would reflect some profit-taking in the stock.
Our Screening Parameters
- Percentage Change Price (52 Weeks) = Top #50: This item selects the top 50 stocks with the best percentage price change over the last 52 weeks. This parameter ensures we get stocks that have appreciated the maximum over the past one year.
- Percentage Change in Price (1 Week) = Bottom #10: From the above 50 stocks, we then choose those that are also among the 10 worst performers over a short one-week period.
- Zacks Rank #1: No matter whether market conditions are good or bad, stocks with a Zacks Rank #1 (Strong Buy) have a proven history of outperformance. You can see the complete list of today’s Zacks #1 Rank stocks here.
- 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 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 or 2 (Buy) handily outperform other stocks.
- Current Price greater than 5: The stocks must all be trading at a minimum of $5.
- Market Capitalization = Top #3000: We have chosen stocks that are among the top 3000 in terms of market value to ensure strong liquidity.
- Average 20-Day Volume greater than 100,000: A substantial trading volume ensures that these stocks are easily tradable.
Here are four of the seven stocks that made it through this screen:
Shares of Central Garden & Pet Co (NASDAQ:CENT), a leading innovator, marketer and producer of quality branded products for the lawn & garden and pet supplies markets, went up nearly 113% in the past one year. The company has a Momentum Style Score of ‘A’.
McDermott International (NYSE:MDR) is one of the leading worldwide energy services companies. The stock appreciated over 57% in the past one year and has a Momentum Style Score of ‘B’.
Triton International Limited (NYSE:TRTN), which offers acquisition, leasing, re-leasing, and sale of intermodal containers, soared over 83% in the past one year and carries a Momentum Style Score of ‘B’.
MGIC Investment Corp. (NYSE:MTG) provides wear-resistant products, application engineering, and services of material science to the industrial production, transportation, earthworks, energy, construction, process industries, and aerospace sectors worldwide. The stock rallied over 52% in the past one year and has a Momentum Style Score of ‘B’.
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.
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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