Momentum investing revolves around the idea of following a stock's recent trend in either direction. In the 'long' context, investors will be essentially be "buying high, but hoping to sell even higher." With 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 that way. 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 Applied Optoelectronics (AAOI - Free Report) , a company that currently holds a Momentum Style Score of A. We also talk about price change and earnings estimate revisions, two of the main aspects of the Momentum Style Score.
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. Applied Optoelectronics 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 AAOI that show why this maker of fiber optic products used by cable TV providers shows promise as a solid momentum pick.
A good momentum benchmark for a stock is to look at its short-term price activity, as this can reflect both current interest and if buyers or sellers currently have the upper hand. It is also useful to compare a security to its industry, as this can help investors pinpoint the top companies in a particular area.
For AAOI, shares are up 11.19% over the past week while the Zacks Electronics - Semiconductors industry is up 1.9% over the same time period. Shares are looking quite well from a longer time frame too, as the monthly price change of 24.52% compares favorably with the industry's 2.85% performance as well.
Considering longer term price metrics, like performance over the last three months or year, can be advantageous as well. Over the past quarter, shares of Applied Optoelectronics have risen 53.35%, and are up 49.55% in the last year. On the other hand, the S&P 500 has only moved 18.72% and 20.78%, respectively.
Investors should also pay attention to AAOI'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. AAOI is currently averaging 1,547,342 shares for the last 20 days.
The Zacks Momentum Style Score also takes into account trends in estimate revisions, in addition to price changes. Please note that estimate revision trends remain at the core of Zacks Rank as well. A nice path here can help show promise, and we have recently been seeing that with AAOI.
Over the past two months, 6 earnings estimates moved higher compared to none lower for the full year. These revisions helped boost AAOI's consensus estimate, increasing from -$0.92 to -$0.72 in the past 60 days. Looking at the next fiscal year, 4 estimates have moved upwards while there have been no downward revisions in the same time period.
Taking into account all of these elements, it should come as no surprise that AAOI is a #2 (Buy) stock with a Momentum Score of A. If you've been searching for a fresh pick that's set to rise in the near-term, make sure to keep Applied Optoelectronics on your short list.