Play The Momentum With These 4 Stocks

In basketball, when a player has made a few shots in a row, the player 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 move against the drift.

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 come back to 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 #300: This item selects the top 300 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 #150: From the above 300 stocks, we then choose those that are also among the 150 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 the best to grab a stock and take advantage of its momentum with the highest probability of success. Stocks with a Momentum Style Scoreof '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 3000 in terms of market value, to make sure that our stocks have strong liquidity.

Average 20 Day Volume greater than 100,000: A substantial trading volume ensures that these stocks are easily tradable.

Here are four of the seven stocks that made it through this screen:

Shenandoah Telecommunications Co. (NASDAQ:SHEN) provides regulated and unregulated telecommunications services to end-user customers and other telecommunications providers. The stock has appreciated almost 108% in the past one year and boasts a Momentum Style Score of ‘A’.

Weight Watchers International, Inc. (NYSE:WTW) , which offers weight management services worldwide, has gained about 183% over the past one year and has a Momentum Style Score of ‘B’.

Dycom Industries Inc. (NYSE:DY) provides diverse services such as engineering, construction, maintenance and installation for cable and telephone companies. The stock has soared over 42% in the past one year and carries a Momentum Style Score of ‘A’.

WebMD Health Corp. (NASDAQ:WBMD) provides health information services through its public and private online portals, mobile platforms, and health-focused publications in the U.S. The stock has gone up by 38% over the past one year and sports a Momentum Style Score of ‘A’.

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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