A stronger-than-expected U.S. jobs report in July has taken the markets by surprise and fanned increased volatility with a sharp fall in the broader equity indices. The economy reportedly added 528,000 jobs compared with consensus estimates of 258,000 job additions, with the unemployment rate falling to 3.5% - the lowest level since 1960. This fueled a downtrend as investors feared another aggressive round of Fed interest hike to cool the economy. 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 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, i.e., before prices become rational again.
In this context, stocks like Encore Wire Corporation WIRE, Delek US Holdings, Inc. DK and Exxon Mobil Corporation XOM 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 irrespective 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 the three of the five stocks that made it through this screen:
Headquartered in McKinney, TX, Encore Wire Corporation offers a broad range of copper and aluminum electrical wires and cables. This industrial goods manufacturer focuses on maintaining a low cost of production while providing power generation and distribution solutions for the energy demands of customers. Encore has gained 38.9% in the past year but declined 13.8% in the past week. It has a Momentum Score of A.
Brentwood, TN-based Delek US Holdings, Inc. is an independent refiner, transporter and marketer of petroleum products. Its refineries are operational in Tyler and Big Spring, Texas, El Dorado, Arkansas and Krotz Springs, Louisiana, with a combined nameplate crude throughput capacity of 302,000 barrels per day. The stock has appreciated 46% in the past year but declined 6.7% in the past week. It has a Momentum Score of A and a long-term earnings growth expectation of 17%.
Headquartered in Irving, TX, Exxon Mobil Corporation produces crude oil and natural gas in the United States and internationally. Its bellwether status in the energy space, optimal integrated capital structure that has historically produced industry-leading returns and management's track record of capex discipline across the commodity price cycle make it a relatively lower-risk energy sector play. The stock has appreciated 54.6% in the past year but declined 6.4% in the past week. It has a Momentum Score of A and a long-term earnings growth expectation of 24.1%.
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.
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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Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
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Encore Wire Corporation (WIRE) : Free Stock Analysis Report
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