When value or growth investing fails to fetch sustained profits, investors should explore another time-tested winning strategy that simply bets on the frontrunner stocks. This is known as momentum investing.
For long-term investors, reacting emotionally to volatile trends can be more damaging to a portfolio’s performance than the downturn itself. By adhering to a well-thought-out investment plan, investors may be better off during periods of short-term uncertainty. 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 likely to continue in that direction.
There’s a whole list of behavioral biases that most investors exhibit. For instance, there are investors who are anxious about booking losses and hence, hold on to losing stocks for too long, hopeful of a rebound in prices. On the other hand, a few investors sell their winners way too early. Momentum investing is one of the best strategies to avoid making such mistakes.
Momentum strategy works because investors initially tend to underreact to news, events or data releases. However, once things become clear, they tend to go with the flow and overreact, causing dramatic price reactions.
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 which 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 market stages. So obviously, this strategy is quite tricky to be implemented as detecting these trends well ahead of time is no child’s play.
Here, we have created a strategy that will help investors get in on these fast movers when there is a short-term pullback in price, and rake in handsome gains.
Percentage Change in 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 the best stocks that have appreciated steadily over the past 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. This parameter picks the ones that have witnessed a short-term pullback in price.
Zacks Rank #1: No matter whether it is a good market or bad, stocks sporting 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: While ensuring solid momentum features, a Momentum Score of A or B knocks out a lot of the screening process, as it takes into account several factors including volume change and relative performance. Stocks with a Momentum 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 prices of the stocks should not be too low.
Market Capitalization = Top #3000: We have chosen stocks that are among the top 3000 in terms of market value to ensure stability of price.
Average 20-Day Volume greater than 100,000: A substantial trading volume ensures that these stocks are easily tradable.
Here are three of the seven stocks that made it through this screen:
FTI Consulting, Inc. FCN provides business advisory services worldwide. The stock has gained more than 53% in the past year but declined 4.2% over the past week. It has a Momentum Score of A.
The Scotts Miracle-Gro Company SMG manufactures and sells consumer lawn and garden products in the United States and internationally. The stock has surged nearly 44% in the past year and has a Momentum Score of B. Shares of the company have declined 4% over the past week.
PennyMac Financial Services, Inc. PFSI, through its subsidiaries, engages in the mortgage banking and investment management activities in the United States. The stock has gained more than 53% in the past year but declined 5.9% over the past week. It has a Momentum 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.
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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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PennyMac Financial Services, Inc. (PFSI): Free Stock Analysis Report
The Scotts Miracle-Gro Company (SMG): Free Stock Analysis Report
FTI Consulting, Inc. (FCN): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.