Just as there are countless different sectors of stocks for every flavor of economic sentiment, there are a variety of different approaches to investment as well. Broadly speaking, investing can be bifurcated into two categories. These are playing the fundamentals and playing the technicals. And while the latter is often dependent on the former, it is possible to isolate them and focus only on one strategy.
Investing with the fundamentals involves an understanding of a firm's balance sheet and its market performance. Companies with stable cash flows, significant share price ratios to their earnings, large growing markets, and countless other metrics are often preferred depending on the investing strategy. Investing with technicals is a graph-based game that looks at share price trends, market sentiment measured through the volume of shares traded, and a handful of other metrics.
These days, the macroeconomic environment is one of the most watched indicators. Specifically, investors are wondering if there will be a recession in America and how effective the Federal Reserve's fight against inflation has been. For the latter, June has proven to be an interesting month. Economy watchers were left confused when the May jobs report from the Labor Department revealed that while the number of jobs grew, the unemployment rate also ticked up. However, as the second week of June kicked in, the market was dealt a pleasant surprise.
The Labor Department came out with some good news (at least for investors) in its unemployment insurance claims report. Its data showed that the initial claims for the week ending on June 3rd were 261,000 marking a 28,000 jump from the prior week. According to the department, the only time in recent history the number of claims was higher was during the coronavirus pandemic when the claims at the end of October 2021 stood at 264,000. State wise, California accounted for half of the weekly jump, reporting 5,173 additional non seasonally adjusted claims.
The market, safe to say, was ecstatic. Economists polled by Reuters had expected the claims figure to come in at 235,000 so the data beat expectations by quite a margin. However, before you get too enthusiastic, keep in mind that economists are also urging caution, as the numbers are quite volatile on a weekly basis and since the data is dominated by a handful of states instead of being a broader occurrence. Some also believe that the data might also be influenced by automakers' seasonal shutdown of plants to retool their machines.
Turning to the markets, the NASDAQ jumped by 89 basis points while the NASDAQ 100 rose by a little over one percent. This is because the technology sector is one of the most sensitive ones to high interest rates and the latest release hints that perhaps the Federal Reserve might exercise more restraint. The S&P500 marked a smaller, 49 basis point increase while the NYSE Composite was up by 12 basis points. However, the Russell 2000 index was down by 49 basis points, since the latest data also points to an economic slowdown which often negatively affects small-cap companies.
So how to play these recent market trends? Well, on the technical side of investing, one popular strategy is momentum investing. Simply put, momentum investing involves taking a look at recent price trends to determine if there are a sufficient number of buyers and sellers of stock and if their interest can create a self sustained period of price movements that can be leveraged for profit. The seminal work on momentum investing, and one that laid the ground work for today's strategy, was a research paper from Narasimhan Jegadeesh and Sheridan Titman published in The Journal of Finance March 1993 edition. This paper examined NYSE and AMSE stocks between 1965 and 1989 and the results of sixteen trading strategies that picked stocks on the basis of historical stock returns ranging from one to four quarters. All the strategies that the researchers studied yielded positive results, leading them to conclude:
Trading strategies that buy past winners and sell past losers realize significant abnormal returns over the 1965 to 1989 period. For example, the strategy we examine in most detail, which selects stocks based on their past 6-month returns and holds them for 6 months, realizes a compounded excess return of 12.01% per year on average. Additional evidence indicates that the profitability of the relative strength strategies are not due to their systematic risk. The results of our tests also indicate that the relative strength profits cannot be attributed to lead-lag effects that result from delayed stock price reactions to common factors. The evidence is, however, consistent with de- layed price reactions to firm-specific information.
So, it appears that there are indeed quite a lot of benefits when taking a momentum based approach to investing. Naturally, this led us to take a look at some momentum stocks that billionaires are buying and some top picks are Campbell Soup Company (NYSE:CPB), AutoZone, Inc. (NYSE:AZO), and Mettler-Toledo International Inc. (NYSE:MTD).
Momentum Stocks Billionaires Are Loading Up On
Our Methodology
To make our list of the momentum stocks being bought by billionaires, we used three indicators - the relative strength index (RSI), the average volume, and the 50-day simple moving average. The RSI measures how fast a stock's price is rising or falling, the average volume analyzes whether the shares traded are above typical levels, and the 50-day simple moving average smooths out price fluctuations. Through these, we first narrowed down to an initial list of stocks based on criteria that looks whether the stock's 50-day moving average was above the 200-day moving average, whether the RSI indicated an oversold stock, and if its relative volume was twice the normal levels. Finally, to ensure that only quality stocks were included, stocks with only recommended Hold or better ratings were picked. This presented us with an initial list of 20 momentum stocks with the best analyst ratings. We then used Insider Monkey's database of billionaire-owned stocks and choose 10 out of these 20 stocks with the highest number of billionaire investors as of the first quarter of 2023.
Ciena Corporation (NYSE:CIEN) is an American technology firm headquartered in Hanover, Maryland. It operates networking and automation platforms enabling customer networks to run switching and other functions.
By the end of this year's first quarter, 32 of the 943 hedge funds part of Insider Monkey's database had held a stake in Ciena Corporation (NYSE:CIEN). Out of these, the firm's largest investor is Richard Mashaal's Rima Senvest Management with a $99 million stake.
Along with AutoZone, Inc. (NYSE:AZO), Campbell Soup Company (NYSE:CPB), and Mettler-Toledo International Inc. (NYSE:MTD), Ciena Corporation (NYSE:CIEN) is a hot momentum stock also finding favor from billionaires.
Diageo plc (NYSE:DEO) is one of the largest alcoholic beverage companies in the world. It operates in more than a hundred locations all over the world and sells a variety of different alcoholic drinks including whiskey, beer, and hard seltzer.
Insider Monkey took a look at 943 hedge funds for their March quarter of 2023 investments and found out that 23 had bought the firm's shares. Diageo plc (NYSE:DEO)'s largest hedge fund investor is Tom Gayner's Markel Gayner Asset Management which owns 1.3 million shares that are worth $244 million.
Signet Jewelers Limited (NYSE:SIG) is one of the world's largest jewelry companies. It primarily makes and sells diamond products and has stores all over the world. Signet Jewelers Limited (NYSE:SIG) is headquartered in Hamilton, Bermuda.
28 of the 943 hedge funds profiled by Insider Monkey had bought and invested in Signet Jewelers Limited (NYSE:SIG)'s shares as of March 2023. Robert Joseph Caruso's Select Equity Group is its largest investor with a $687 million investment.
Brinker International, Inc. (NYSE:EAT) is an American firm headquartered in Dallas, Texas. It operates and franchises restaurant brands such as Chilli's Wings and It's Just Wings in the U.S. and all over the world.
After digging through 943 hedge funds for their Q1 2023 shareholdings, Insider Monkey found out that 24 had held a stake in the restaurant company. Brinker International, Inc. (NYSE:EAT)'s largest investor is Brandon Haley's Holocene Advisors with a $70 million investment.
Smartsheet Inc. (NYSE:SMAR) is a technology company based in Bellevue, Washington. The firm was set up in 2005 and it provides a software as a service (SaaS) platform that allows users to work and collaborate with each other.
Insider Monkey's first quarter of 2023 research covering 943 hedge funds outlined that 50 had bought Smartsheet Inc. (NYSE:SMAR)'s shares. Out of these, the firm's largest hedge fund investor is Michael Kahan and Jeremy Kahan's North Peak Capital since it owns 4.5 million shares that are worth $216 million.
Campbell Soup Company (NYSE:CPB), Smartsheet Inc. (NYSE:SMAR), AutoZone, Inc. (NYSE:AZO), and Mettler-Toledo International Inc. (NYSE:MTD) are some top momentum stocks that billionaires are also buying.
