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Momentum Anomaly Stocks in Focus as Q3 Earnings Kick Off

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It’s the earnings season again — a highly active time for market participants.

Third-quarter earnings are expected to show continued improvement, a trend that has been in place since early July, thanks to the reopening of the economy. That said, the pandemic continues to hinder growth.

Ideally, investors should be less focused on the near term and stick with their long-term investment strategies to create wealth. At the same time, it’s legit to remain wary of the market turbulence, at least up to the run-up to the presidential election.

Speculation is aplenty about the rising tensions between the world’s two “powerhouse” economies. Importantly, all eyes are on drug makers as to how soon they can develop a coronavirus vaccine. Until then, get used to whipsaw as the new normal.

Against this backdrop, reacting hastily to volatile trends can cause more damage to one’s portfolio returns than an actual downturn. When value or growth investing fails to fetch sustained profits, one should explore another time-tested winning strategy that simply bets on frontrunner stocks. In short, one of the most successful strategies today is to get in on momentum stocks at the right time.

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 the 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 strategy works. For instance, some investors are anxious about booking losses and hence hold on to losing stocks for too long, hopeful of a rebound in prices. Meanwhile, a few investors sell their winners way too early.

Furthermore, investors initially tend to underreact to news, events or data releases. However, once things become clear, they tend to go with the flow and overreact, causing dramatic price reactions.

These behavioral problems extend trends, thus opening up huge opportunities for momentum players. So basically, it’s a way to profit from the general human tendency to extrapolate current trends into the future.

Momentum strategies have been known to be alpha-generative over a long period and across market stages. So obviously, this strategy is quite tricky to implement, as detecting these trends is no child’s play.

Here, we have created a strategy that will 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.

Screening Parameters

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: No matter whether market conditions are good or bad, stocks sporting a Zacks Rank #1 (Strong Buy) have a proven history of outperformance. 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, including 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 four of the seven stocks that made it through this screen:

Lennar Corporation (LEN - Free Report) is one of the nation’s leading builders of quality homes for all generations. The stock has returned 42.5% in the past year but has shown nearly no movement in the past week. It has a Momentum Score of A.

Headquartered in Corte Madera, CA, RH (RH - Free Report) is a curator of design, taste and style in the luxury home furnishings market. The stock has soared 103.9% in the past year but has lost 3.5% in the past week. It has a Momentum Score of A.

Thor Industries, Inc. (THO - Free Report) is the sole owner of operating subsidiaries that, combined, represent the world’s largest manufacturer of recreational vehicles. The stock has rallied 80.6% in the past year and has a Momentum Score of B. Shares of the company have declined 3.3% in the past week.

Based in Scottsdale, AZ, Meritage Homes Corporation (MTH - Free Report) is a leading designer and builder of single-family homes. The stock has gained 57.9% in the past year but has lost 2% in the past week. It has a Momentum 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 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.