Yes, the supposed benefits of buying stocks low and selling them
high is a lie. A fallacy. A mirage.
Before you write me off as some kind of heretic, let me clear
something up. I am actually a diehard value investor. And yes, for
a long time I bought in to the allure of buying low and selling
high as the road to investment success. However, after the early
years of futility I found a better, more profitable path.
I am talking about an investing method that uncovers timely stocks
experiencing phenomenal levels of momentum. Not just technical
momentum. But earnings momentum as well, which is the main "cause"
behind the "effect" of ever higher stock prices. And yes, in this
method one can be diligent enough to apply value principles to
avoid overpriced stocks.
Below I will share the virtues of this momentum model and how to
apply it yourself. First, I want to explain to you...
Why "Buy Low, Sell High" Doesn't Really Work
In the perfect world scenario, the prudent value investor uncovers
a healthy, growing company that has been neglected by other
investors, leading to a ridiculously low valuation. They scoop up
this stock for peanuts and then patiently wait for the rest of the
world to see the error of their ways. After the stock price rockets
higher, they sell out and seek to "rinse and repeat" with the next
value stock.
I admit that sounds great. And it can happen every now and then.
But far too often the stock is not neglected. Its price is down for
very good reasons, which will keep it down for a long time. Here
are two of the most common reasons:
-
Earnings Outlook on the Decline:
Most investors have the false belief that year over year earnings
growth is what moves stocks. Our in-depth research clearly shows
this not to be the case. In fact, stocks with the highest growth
rates actually have the lowest annual returns (and amazingly
those with the lowest growth rates actually provide the best
returns).
The reality is that beating earnings expectations is even more
important. Meaning that a boring utility stock that grows at 4% a
year versus a 3% estimate will crush the returns of a nano-tech
stock whose earnings growth expectations slow from 40% to
30%.
More...
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Insiders Know What's Wrong...
But You Don't
:
This is especially true on smaller stocks that have little or no
analyst research coverage. So when investors analyze the stock,
they are mostly just reading company press releases and annual
reports. To be honest, these are nothing more than marketing
pieces filled with spin from the company to get you interested in
the stock. Unfortunately insiders and deep-pocketed professional
investors know what's wrong with the company and why the share
price is rightfully in the toilet. (Hint: If a company has more
than 10% of its shares shorted, then most likely the pros know
there is trouble with the company and you should take that as a
warning to stay far away.)
Momentum Trading as Easy as 1, 2, 3
OK. So if the age-old value investing approach is a bust, then what
does work? The answer is a potent combination of the 3 elements
below:
1) Earnings Momentum:
When companies are experiencing positive earnings momentum, it
means that most everything is going right, i.e., they have a great
management team, first rate products and services, happy employees
and delighted customers. These aspects have a self-reinforcing
quality that will keep the company headed in the right direction
for an extended period of time. The result being a string of
positive earnings reports well above expectations and a booming
stock price. The best way to uncover earnings momentum is to find
stocks enjoying large upward estimate revisions (or a Zacks Rank of
1 or 2).
2) Technical Momentum:
Isaac Newton had it right.
"A body in motion tends to stay in motion."
So you should seek stocks whose share prices have been on the rise.
Not just in the last few weeks, but over a longer stretch as well,
so you know it's not a fluke. This greatly increases your chances
that other investors are aware of the positive aspects of the
stock...and likely to stay that way.
3) Value:
I know on the surface it sounds antithetical that these stocks
could be on the rise and trading at a discount at the same time.
But it happens quite often. Sometimes it's because their industry
group is out of favor. Or that the stock has just had a round of
profit taking that pushes down the price 10-20% and now is ready to
make new highs.
In this method, we are not seeking deep value stocks with low odds
of success. It's about finding momentum stocks trading at
discounted prices. When you add it all up, you get more timely
trades + higher % success rate = handsome profits.
Where to Find the Best Momentum Stocks?
If you have handily beaten the market over the last several years,
then stick with the strategies that are working for you. However,
if you have a spotty track record, then likely you need some
assistance in charting a course to better results.
We here at Zacks have a time-tested model, the Zacks Rank, which
finds the best momentum stocks that are harnessing the power of
earnings estimate revisions. The +26% annual return of our top
stocks has drawn millions of investors to Zacks.com to use our
resources.
But there's a more effective way to take advantage of the Zacks
Rank. We've set up several private portfolio recommendation
services that provide a small, select group of stocks to serve a
variety of investment styles. For example,
Insider Trader, Chart Patterns Trader, Income Plus Investor,
Options Trader, Value Investor, Whisper Trader, and more.
Which of them best fits you?
The best way to select the service that's right for you is to try
them all. With
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Best,
Steve Reitmeister
Steve is the Executive VP in charge of Zacks.com and all of its
subscription services. His personal mission is to help investors
achieve life-changing investment success by harnessing the power of
earnings estimate revisions. Over the years, he has developed a
full array of services to help investors do just that. Discover all
of these services now to find the ones that perfectly fit your
investment style.
Learn more about Zacks Ultimate.
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