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 PennyMac Financial (PFSI - Free Report) , a company that currently holds a Momentum Style Score of B. 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. PennyMac Financial currently has a Zacks Rank of #1 (Strong 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 PFSI that show why this mortgage banking and investment management company 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 is also useful to compare a security to its industry, as this can help investors pinpoint the top companies in a particular area.
For PFSI, shares are up 4.6% over the past week while the Zacks Financial - Mortgage & Related Services 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 15.17% compares favorably with the industry's 3.45% performance as well.
While any stock can see a spike in price, it takes a real winner to consistently outperform the market. Shares of PennyMac Financial have increased 40.39% over the past quarter, and have gained 39.04% in the last year. On the other hand, the S&P 500 has only moved 3.69% and 5.5%, respectively.
Investors should also pay attention to PFSI'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. PFSI is currently averaging 366,414 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 PFSI.
Over the past two months, 2 earnings estimates moved higher compared to none lower for the full year. These revisions helped boost PFSI's consensus estimate, increasing from $2.91 to $3.55 in the past 60 days. Looking at the next fiscal year, 2 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 PFSI is a #1 (Strong Buy) stock and boasts a Momentum Score of B. If you're looking for a fresh pick that's set to soar in the near-term, make sure to keep PennyMac Financial on your short list.