In basketball, when a player has made a few shots in a row, he is said to have a “hot hand.” In finance parlance, we call it “momentum.”
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 more likely to continue in that direction than go against the drift. In fact, one of the most successful investing strategies today is to get in on momentum stocks at the right time.
Thus, this strategy calls for hitching a ride on an already fast-moving train, without fretting about valuations or growth prospects. But why does momentum strategy work?
There’s a whole laundry list of behavioral biases that most investors exhibit, and these emotional responses and mistakes are the very reason that momentum works. For instance, we all know of investors who are afraid to book losses, and hence hold onto losing stocks for too long, hoping that they will regain their original prices. On the other hand, investors sell their winners way too early.
Furthermore, investors initially tend to under-react to news, events or data releases. However, once things become clear, they tend to go with the herd and overreact, causing dramatic price reactions.
These behavioral issues open up a huge opportunity for momentum players to make profits. So, it’s a way to profit from the general human tendency to extrapolate current trends into the future.
Momentum investing is based on that gap in time that exists before the mean reversion occurs, i.e. before prices become rational again.
Obviously, this strategy is quite tricky to implement, as detecting these trends is no child’s play. Momentum strategies have been known to be alpha-generative over long periods of time and across markets, and we have devised a strategy that will help investors get in on these trades and make handsome gains.
We have created a screen that will help you to take advantage of both long-term price momentum and a short-term pullback in price, which would reflect profit-taking in the stock.
Screening Parameters
Percentage Change Price (52 Weeks) = Top #100: This itemselects the top 100 stocks with the best percentage price change over the last 52 weeks.This parameter ensures that we get stocks that have appreciated the most over the past one year.
Percentage Change in Price (1 Week) = Bottom #50: From the above 100 stocks, we then choose those that are also among the 50 worst performers over a short one-week period.
Zacks Rank #1: No matter whether the market conditions are good or bad, stocks with a Zacks Rank #1 (Strong Buy) have a proven history of outperformance.
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 including 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 Style Score of 'A' or 'B', when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy), handily outperform other stocks.
Current Price greater than 5: The stocks must all be trading at a minimum of $5 or higher.
Market Capitalization = Top #3000: We have chosen stocks that are among the top 3,000 in terms of market value, to make sure that our stockshave strong liquidity.
Average 20-Day Volume greater than 100,000: A substantial trading volume ensures that these stocks are easily tradable.
Here are 5 of the 15 stocks that made it through this screen:
Tahoe Resources Inc. TAHO explores, develops, and operates mines in the Americas, primarily producing copper, gold, silver, lead/zinc, and natural gas and petroleum. The stock has soared over 91% in the past one year, and carries a Momentum Style Score of ‘A’.
Louisiana-Pacific Corp. LPX, which manufactures building materials and engineered wood products in the United States, Canada, Chile and Brazil, has gained more than 40% over the past one year, and has a Momentum Style Score of ‘B’.
QEP Resources, Inc. QEP is a leading independent natural gas and oil exploration and production company. The stock has appreciated over 24% in the past one year, and boasts a Momentum Style Score of ‘A’.
MKS Instruments, Inc. MKSI provides instruments, subsystems, and process control solutions that measure, control, power, monitor, and analyze critical parameters of manufacturing processes worldwide. The stock has gained nearly 33% over the past one year, and also has a Momentum Style Score of ‘A’.
Owens Corning OC makes glass fiber reinforcements and other materials for composites; and residential and commercial building materials. The stock has gone up by over 22% over the past one year, and has a Momentum Style 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.
Click here to sign up for a free trial to the Research Wizard today.
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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