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
of ever higher stock prices. And yes, in this method one can be
diligent enough to apply value principles to avoid overpriced
Below I will share the virtues of this momentum model and how to
apply it yourself. First, I want to explain to you...
"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
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%.
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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
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
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 price has 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.
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 just had a round of profit
taking that pushes down the price 10-20% and now is ready to make
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
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
And now we've developed an effective way to take advantage of
the Zacks Rank through 13 unique portfolio strategies. Each
portfolio provides you with our top recommendations for every
• From short-term trading to long-term investing
• From value to growth
• From fundamental to technical
• From stable income to hot momentum
Which of them fits you best?
The best way to select the service that's right for you is to
try them all. And today it has never been easier to get this
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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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