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3 Stocks Witnessing Momentum Anomaly Amid Covid-19 Outbreak

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The most valuable U.S. company Apple Inc.’s (AAPL - Free Report) lackluster guidance has hurt investor optimism that stimulus measures by China would protect the global economy from the effects of the covid-19 outbreak. On Monday, Apple communicated that it would not meet its revenue guidance for the March quarter due to the severe impact of the epidemic on both production and sales in China, where most iPhones are made. China-based smartphone maker Xiaomi Corp. last week also flagged a hit to its sales for the quarter.

That said, earnings growth was anemic in 2019, primarily because of the tough comparisons with the all-time record corporate profits the year before, which had received a boost from the tax cut legislation. Earnings estimates for first-quarter 2020 are being revised downward, with the epidemic weighing on near-term outlook. Given the evolving nature of this headwind, it is reasonable to expect that estimates will move further south in the coming days, acting as a big drag on corporate profits.

Also, the news that Trump administration is considering changing U.S. regulations to block shipments of chips to Huawei from companies like Taiwan’s TSMC, the world’s largest contract chipmaker, is hurting market sentiments. On Tuesday, China said that it would accept applications for new tariff exemptions for 696 products imported from the United States, including agricultural and energy products such as pork, beef, soybeans, liquefied natural gas and crude oil. Some U.S. officials and analysts have raised questions about China’s ability to meet the purchasing commitments specified in the Phase 1 trade deal due to the virus.

The exemptions, the third and the most substantial set to be granted to date since the start of the trade dispute, comes a month after the signing of a Phase 1 trade deal between Washington and Beijing. China has committed to boosting its purchases of goods and services from the United States by $200 billion over two years.

Against this macro backdrop, reacting emotionally to volatile trends can cause more damage to a portfolio’s return than a downturn. When value or growth investing fails to fetch sustained profits, one should explore another time-tested winning strategy that simply bets on the frontrunner stocks. This is known as momentum investing.

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 likely to continue in that direction. There’s a whole list of behavioral biases that most investors exhibit. For instance, there are investors who 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 mistakes. So, basically, it’s a way to profit from the general human tendency to extrapolate current trends into the future. Momentum investing is, thus, based on that gap in time, which exists before the mean reversion occurs i.e. before prices become rational again.

Here, we have created a strategy that will help investors get in on these fast movers when there is a short-term pullback in price, and rake in handsome gains.

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 it is a good market 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: While ensuring solid momentum features, a Momentum Score of A or B knocks out a lot of the screening process, as it takes into account several factors including volume change and relative performance. 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 prices of the stocks should not be too low.

Market Capitalization = Top #3000: We have chosen stocks that are among the top 3000 in terms of market value to ensure 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 seven stocks that made it through this screen:

Lumentum Holdings Inc. LITE manufactures and sells optical and photonic products in the Americas, Asia-Pacific, Europe, Middle East and Africa. The stock has added a whopping 85.6% in the past year but fell 2.2% over the past week. It has a Momentum Score of A.  

TEGNA Inc. TGNA operates as a media company in the United States. The stock has gained 38.8% in the past year and has a Momentum Score of A. Shares of the company have lost 2.4% over the past week.

YETI Holdings, Inc. YETI designs and distributes products for the outdoor and recreation market in the United States, Canada, Australia and Japan. The stock has surged 37.4% in the past year and has a Momentum Score of A. Shares of the company have lost 8.3% over the past week.

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 own 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.


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