Education: Momemtum Investing

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Screening for Momentum

As discussed in a previous section of the educational site on Zacks.com, momentum investing does not carry any kind of specific critieria. Every investor has their own personal style that allows them to create strategies to express their opinions in the market. Some momentum investors like to see earnings estimates upgrades, while others may want to focus on stocks that are establishing new 52-week highs. The specifics of the style are truly left to the investor to totally customize.

But once the methodology and parameters have been established, Zacks offers some very powerful automated tools that can help the individual investor wade through a sea of information and land at the doorstep of opportunity.

In order to demonstrate the effectiveness of these tools in capturing a certain trading style, we are going to create a "momentum screen" with the listed criteria below. These specific criteria are totally customizable, so we are going to keep it fairly simple for this example. The criteria for our momentum screen are listed below.

Zacks #1 Rank Stock (great fundamentals)

Zacks monitors over 4400 stocks in order to find the companies that have the most attractive basket of fundamental data. Out of these 4400, only 5% can carry a #1 ranking. This is very distinguished territory and only the best companies have this rating.

Trading at least 85% of 52-week high

Stocks that are near or approaching their 52-week highs tend to be reinforced by either already reported strong earnings or anticipated strong earnings. The chart is a reflection of a company's performance. And when a stock is positioned to set a new high, it is a very positive indicator.

Last EPS surprise > 5%

Companies that beat analyst earnings projections are by definition outperforming expectations. When this happens, it tends to generate a wave of enthusiasm as investors rush in to capitalize on the new information.

% change in estimates > 5% last 4 weeks

Estimate revisions reflect new fundamental information that in turn effects a companies growth and profitability trajectory. An upward revision is at the height of fundamental upgrades, and it is a significant indicator that the company is moving towards increased profitability.

Running Our Screen

When we have successfully defined the criteria we want to use to generate our momentum screen, we then need to input the data into the Zacks Custom Screener. Now comes the fun part, it is time to run the screen to see what kind of exciting stocks have been returned!

When the screen returns the stocks that fit the listed criteria, that is when an investor can get down to business in order to evaluate the attractiveness of any given stock compared to other industry competitors or against a broader segment of the market.

Creating strategies and using the Zacks Custom Screener to execute trading strategies enables investors to mine through millions of data sets in order to identify stocks that match a specific criteria set in order to maximize the potential for high-quality returns.