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3 Momentum Anomaly Stocks to Buy on Positive Economic Data
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The broader equity market has witnessed a steady uptrend over the past few trading days on solid economic data that allayed the fears of recession from the near-term horizon to at least until 2024. The revised GDP data for first-quarter 2023 showed that the economy grew at an annualized pace of 2%, up from the previous estimate of 1.3% growth and broad-based expectations of 1.4% rise. Much of this sturdy economic resilience was perceived to be driven by a healthy uptrend in consumer spending and export basket. Consumer spending, as gauged by personal consumption expenditures, increased 4.2% in the January-March quarter, while exports were up 7.8% after falling 3.7% in the fourth quarter of 2022.
The markets were further propelled by the Federal Reserve's decision to hit a pause button in its aggressive rate hike regime to maintain its benchmark interest rate in the range of 5-5.25%. This buoyed the stock market rally as investors largely expect the rate-hiking cycle to be nearly over, although the Fed indicated that two more hikes are likely to occur later this year.
The focus has now shifted to the Fed’s Jul 25-26 policy meeting, which is expected to be another potential market catalyst. With uncertainty becoming the norm of the day, investors often seek to employ time-tested winning strategies to fetch sustained profits. One of the most successful game plans to beat the blues is to bet on momentum stocks when value or growth investing fails to generate the desired profits.
This approach primarily tends to follow the adage, “the trend is your friend.” At its core, momentum investing is “buying high and selling higher.” It is based on the idea that once a stock establishes a trend, it is more likely to continue in that direction because of the momentum that is already behind it. But before we delve deep into it, let us try to fathom why does the momentum strategy at all work?
There are several behavioral biases that most investors exhibit in their decision-making. And these emotional responses, or rather mistakes, are the very reason that makes the momentum strategy work.
For example, some investors are anxious about booking losses and hence hold on to losing stocks for too long, hopeful of a rebound in prices. On the other hand, a few investors sell their winners way too early. Momentum investing is one of the best strategies to avoid making such errors in judgment.
Furthermore, investors initially tend to underreact to news, events or data releases. However, once things become clear, they have a habit of going with the flow and overreacting, causing dramatic price reactions. These behavioral problems extend trends, thus opening up huge opportunities for momentum players.
To sum up, momentum investing is a way to profit from the general human tendency to extrapolate current trends into the future. It is based on that gap in time before the mean reversion occurs, i.e., before prices become rational again.
Momentum strategies have been known to be alpha-generative over a long period and across market stages. So, this strategy is quite tricky to implement, as detecting these trends is no child’s play.
Here, we have created a strategy to 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.
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 that include 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 three of the six stocks that made it through this screen:
Santa Clara, CA-based NVIDIA is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU. Over the years, the company’s focus has evolved from PC graphics to artificial intelligence (AI) based solutions that now support high-performance computing (HPC), gaming and virtual reality (VR) platforms. The stock has gained 191.3% in the past year but rose a mere 0.3% in the past week. It has a Momentum Score of A.
Based in Los Angeles, CA, KB Home is one of the leading homebuilders in the United States. The company’s Homebuilding operations include building and designing homes that cater to first-time, move-up and active adult homebuyers on acquired or developed lands. KB Home also builds attached and detached single-family homes, town homes and condominiums. The stock has appreciated 74.4% in the past year but declined 0.6% in the past week. It has a Momentum Score of A.
Founded in 2000 and headquartered in McLean, VA, Iridium is the only satellite communications company that offers dedicated commercial global voice and data communications. The company delivers an array of reliable and low-latency communications services to businesses, consumers, wireline and wireless telecommunications operators and Internet service providers. The stock has rallied 62.9% in the past year but is up 0.7% in the past week. Iridium has a Momentum Score of B.
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.
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.
Image: Bigstock
3 Momentum Anomaly Stocks to Buy on Positive Economic Data
The broader equity market has witnessed a steady uptrend over the past few trading days on solid economic data that allayed the fears of recession from the near-term horizon to at least until 2024. The revised GDP data for first-quarter 2023 showed that the economy grew at an annualized pace of 2%, up from the previous estimate of 1.3% growth and broad-based expectations of 1.4% rise. Much of this sturdy economic resilience was perceived to be driven by a healthy uptrend in consumer spending and export basket. Consumer spending, as gauged by personal consumption expenditures, increased 4.2% in the January-March quarter, while exports were up 7.8% after falling 3.7% in the fourth quarter of 2022.
The markets were further propelled by the Federal Reserve's decision to hit a pause button in its aggressive rate hike regime to maintain its benchmark interest rate in the range of 5-5.25%. This buoyed the stock market rally as investors largely expect the rate-hiking cycle to be nearly over, although the Fed indicated that two more hikes are likely to occur later this year.
The focus has now shifted to the Fed’s Jul 25-26 policy meeting, which is expected to be another potential market catalyst. With uncertainty becoming the norm of the day, investors often seek to employ time-tested winning strategies to fetch sustained profits. One of the most successful game plans to beat the blues is to bet on momentum stocks when value or growth investing fails to generate the desired profits.
This approach primarily tends to follow the adage, “the trend is your friend.” At its core, momentum investing is “buying high and selling higher.” It is based on the idea that once a stock establishes a trend, it is more likely to continue in that direction because of the momentum that is already behind it. But before we delve deep into it, let us try to fathom why does the momentum strategy at all work?
There are several behavioral biases that most investors exhibit in their decision-making. And these emotional responses, or rather mistakes, are the very reason that makes the momentum strategy work.
For example, some investors are anxious about booking losses and hence hold on to losing stocks for too long, hopeful of a rebound in prices. On the other hand, a few investors sell their winners way too early. Momentum investing is one of the best strategies to avoid making such errors in judgment.
Furthermore, investors initially tend to underreact to news, events or data releases. However, once things become clear, they have a habit of going with the flow and overreacting, causing dramatic price reactions. These behavioral problems extend trends, thus opening up huge opportunities for momentum players.
To sum up, momentum investing is a way to profit from the general human tendency to extrapolate current trends into the future. It is based on that gap in time before the mean reversion occurs, i.e., before prices become rational again.
In this context, stocks like NVIDIA Corporation (NVDA - Free Report) , KB Home (KBH - Free Report) and Iridium Communications Inc. (IRDM - Free Report) are worth betting on.
Momentum strategies have been known to be alpha-generative over a long period and across market stages. So, this strategy is quite tricky to implement, as detecting these trends is no child’s play.
Here, we have created a strategy to 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: Stocks sporting a Zacks Rank #1 (Strong Buy) have a proven history of outperformance irrespective of the market conditions. 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 that include 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 three of the six stocks that made it through this screen:
Santa Clara, CA-based NVIDIA is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU. Over the years, the company’s focus has evolved from PC graphics to artificial intelligence (AI) based solutions that now support high-performance computing (HPC), gaming and virtual reality (VR) platforms. The stock has gained 191.3% in the past year but rose a mere 0.3% in the past week. It has a Momentum Score of A.
Based in Los Angeles, CA, KB Home is one of the leading homebuilders in the United States. The company’s Homebuilding operations include building and designing homes that cater to first-time, move-up and active adult homebuyers on acquired or developed lands. KB Home also builds attached and detached single-family homes, town homes and condominiums. The stock has appreciated 74.4% in the past year but declined 0.6% in the past week. It has a Momentum Score of A.
Founded in 2000 and headquartered in McLean, VA, Iridium is the only satellite communications company that offers dedicated commercial global voice and data communications. The company delivers an array of reliable and low-latency communications services to businesses, consumers, wireline and wireless telecommunications operators and Internet service providers. The stock has rallied 62.9% in the past year but is up 0.7% in the past week. Iridium has a Momentum Score of B.
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.