Momentum investing is all about the idea of following a stock's recent trend, which can be in either direction. In the 'long' context, investors will essentially be "buying high, but hoping to sell even higher." And for investors following this methodology, taking advantage of trends in a stock's price is key; once a stock establishes a course, it is more than likely to continue moving in that direction. The goal is that once a stock heads down a fixed path, it will lead to timely and profitable trades.
While many investors like to look for momentum in stocks, this can be very tough to define. There is a lot of debate surrounding which metrics are the best to focus on and which are poor quality indicators of future performance. The Zacks Momentum Style Score, part of the Zacks Style Scores, helps address this issue for us.
Below, we take a look at Cadence Design Systems (CDNS - Free Report) , which currently has a Momentum Style Score of A. We also discuss some of the main drivers of the Momentum Style Score, like price change and earnings estimate revisions.
It's also important to note that Style Scores work as a complement to the Zacks Rank, our stock rating system that has an impressive track record of outperformance. Cadence Design Systems currently has a Zacks Rank of #2 (Buy). Our research shows that stocks rated Zacks Rank #1 (Strong Buy) and #2 (Buy) and Style Scores of A or B outperform the market over the following one-month period.
You can see the current list of Zacks #1 Rank Stocks here >>>
Set to Beat the Market?
Let's discuss some of the components of the Momentum Style Score for CDNS that show why this maker of hardware and software products for validating chip designs shows promise as a solid momentum pick.
Looking at a stock's short-term price activity is a great way to gauge if it has momentum, since this can reflect both the current interest in a stock and if buyers or sellers have the upper hand at the moment. It's also helpful to compare a security to its industry; this can show investors the best companies in a particular area.
For CDNS, shares are up 2.35% over the past week while the Zacks Computer - Software industry is flat over the same time period. Shares are looking quite well from a longer time frame too, as the monthly price change of 9.17% compares favorably with the industry's 0.9% performance as well.
While any stock can see a spike in price, it takes a real winner to consistently outperform the market. Shares of Cadence Design Systems have increased 30.84% over the past quarter, and have gained 43.38% in the last year. In comparison, the S&P 500 has only moved 11.39% and 9.86%, respectively.
Investors should also take note of CDNS's average 20-day trading volume. Volume is a useful item in many ways, and the 20-day average establishes a good price-to-volume baseline; a rising stock with above average volume is generally a bullish sign, whereas a declining stock on above average volume is typically bearish. Right now, CDNS is averaging 1,649,904 shares for the last 20 days.
The Zacks Momentum Style Score encompasses many things, including estimate revisions and a stock's price movement. Investors should note that earnings estimates are also significant to the Zacks Rank, and a nice path here can be promising. We have recently been noticing this with CDNS.
Over the past two months, 6 earnings estimates moved higher compared to none lower for the full year. These revisions helped boost CDNS's consensus estimate, increasing from $2.46 to $2.55 in the past 60 days. Looking at the next fiscal year, 6 estimates have moved upwards while there have been no downward revisions in the same time period.
Given these factors, it shouldn't be surprising that CDNS is a #2 (Buy) stock and boasts a Momentum Score of A. If you're looking for a fresh pick that's set to soar in the near-term, make sure to keep Cadence Design Systems on your short list.