The broader equity indices declined in the past few trading sessions as the Fed increased its benchmark interest rates by half a percentage point to a targeted range between 4.25% and 4.5% – the highest level in 15 years. The Fed has vowed to continue its aggressive stance to curb inflation and has put the ‘terminal rate’ to a target range of 5-5.25%, dimming expectations of a Santa Claus Rally and intensifying fears of a global recession. With uncertainty becoming the norm of the day, investors often seek to employ time-tested winning strategies to fetch sustained profits. One of the most successful game plans to beat the blues is to bet on momentum stocks when value or growth investing fails to generate the desired profits.
This approach primarily tends to follow the adage, “the trend is your friend.” At its core, momentum investing is “buying high and selling higher.” It is based on the idea that once a stock establishes a trend, it is more likely to continue in that direction because of the momentum that is already behind it. But before we delve deep into it, let us try to fathom why does the momentum strategy at all work?
There are several behavioral biases that most investors exhibit in their decision-making. And these emotional responses, or rather mistakes, are the very reason that makes the momentum strategy work.
For example, some investors 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 errors in judgment.
Furthermore, investors initially tend to underreact to news, events or data releases. However, once things become clear, they have a habit of going with the flow and overreacting, causing dramatic price reactions. These behavioral problems extend trends, thus opening up huge opportunities for momentum players.
To sum up, momentum investing is a way to profit from the general human tendency to extrapolate current trends into the future. It is based on that gap in time before the mean reversion occurs, ie, before prices become rational again.
In this context, stocks like Super Microcomputer, Inc. (SMCI – Free Report), Dillard’s, Inc. (DDS – Free Report) and Frontline Ltd. (FRO – Free Report) are worth betting on.
Momentum strategies have been known to be alpha-generative over a long period and across market stages. So, this strategy is quite tricky to implement, as detecting these trends is no child’s play.
Here, we have created a strategy to help investors get in on these fast movers and rake in handsome gains. Our screen will help you benefit from both long-term price momentum and a short-term pullback in price.
Percentage Change in Price (52 Weeks) = Top #50: This 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: Stocks sporting a Zacks Rank #1 (Strong Buy) have a proven history of outperformance regardless of the market conditions. 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 that include 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 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 the 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 eight stocks that made it through this screen:
Headquartered in San Jose, CA, Super Microcomputer manufactures high-performance server and storage solutions based on modular and open architecture. It offers an end-to-end IT solutions portfolio, including complete server, storage, modular blade servers, workstations, full racks, networking devices, server management software, server sub-systems and security software. Super Micro Computer has gained 89.6% in the past year but declined 12.2% in the past week. It has a Momentum Score of B.
Founded in 1938, Dillard’s is a large departmental store chain featuring fashion apparel and home furnishings. Its merchandise mix consists of both branded and private-label items. The company’s strategy is to offer more fashion-forward and trendy products to attract customers. Dillard’s is benefiting from continued momentum in consumer demand and better inventory management. The stock has appreciated 20.4% in the past year but declined 9.1% in the past week. It has a Momentum Score of A.
Based in Hamilton, Bermuda, Frontline operates as a leading shipping firm, engaging in the seaborne transportation of crude oil and related oil products worldwide. It owns and operates oil and product tankers. The company generates some fixed charter income for its fleet, primarily through time charters, and trades the balance on the spot market. The stock has rallied 88.9% in the past year but declined 9.3% in 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 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.