The broader U.S. equity markets mostly trended down over the past few trading days on concerns regarding inflation and its consequence on the Federal Reserve’s pledge for a slew of rate cuts this year. Core Personal Consumption Expenditures (PCE) price index for February was up 0.3% month over month, in line with broad-based expectations. On a year-over-year basis, Core PCE increased 2.8%, which was way above the Fed’s 2% inflation target.

This propelled the benchmark 10-year Treasury yields to their highest levels since November and dragged the equity markets down. Investors began to fret about its probable impact on the Federal Reserve’s next policy meeting in May, with the odds of a rate cut declining significantly.     

Earlier, the Fed had pledged to cut interest rates several times in 2024 owing to a decelerating inflation trend in the later stages of 2023. However, given the recent inflationary data, the markets appear vulnerable to sudden downtrends. This, in turn, signifies that the markets need to brace for intense volatility owing to tempered expectations despite a relatively healthy U.S. economy and GDP data.

Amid the uncertainty, 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, make 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 The Gap, Inc. (GPS Quick QuoteGPS - Free Report) , Sterling Infrastructure, Inc. (STRL Quick QuoteSTRL - Free Report) and StoneCo Ltd. (STNE Quick QuoteSTNE - 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 stocks out of the nine that made it through this screen:

With more than 3,500 stores worldwide, Gap is a premier international specialty retailer offering a diverse range of clothing, accessories and personal care products. It offers products for men, women and children under the Old Navy, Gap, Banana Republic, Athleta, Intermix and Hill City brands. Moreover, the company’s products include denim, tees, button-downs, khakis and other trendy assortments, as well as fitness and lifestyle products for training, sports, travel, yoga and other activities. The stock has gained a stellar 180.8% in the past year but declined 6.2% in the past week. Gap has a Momentum Score of A.

Headquartered in The Woodlands, TX, Sterling engages in the provision of e-infrastructure, transportation and building solutions in the United States, primarily across the Southern, Northeastern, Mid-Atlantic and Rocky Mountain regions and the Pacific Islands. The company aims to position itself in the mid-level market, traditionally bidding on work too large for the small local contractors yet too small for the large national and international construction companies. The stock has gained 207.7% in the past year but declined 4.6% in the past week. Sterling has a Momentum Score of B.  

Headquartered in George Town, the Cayman Islands, StoneCo provides financial technology and software solutions to merchants and integrated partners to conduct electronic commerce across in-store, online and mobile channels in Brazil. In financial services, it offers payments, digital banking and credit solutions, while in software, it provides POS and ERP solutions for different retail and services verticals, CRM, engagement tools, e-commerce and Omnichannel solutions. The stock has rallied 81.9% in the past year but declined 1.9% in the past week. StoneCo 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.