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3 Momentum Anomaly Stocks to Consider Amid Coronavirus Scare

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Concerns regarding coronavirus are growing with each passing day, and raising the stakes for central banks and governments to avert a global recession. U.S. stocks tumbled just after market open on Tuesday in the wake of a massive rally on Monday. The Dow, the S&P and the tech-heavy Nasdaq ended Tuesday’s session in red — down 2.94% or 785.89 points to 25,917.41; 2.81% or 86.86 points to 3,003.37; and 2.99% or 268.08 points to 8,684.09, respectively.

Stocks continued to plummet yesterday afternoon after Federal Reserve Chair Jerome Powell discussed the Fed’s emergency move to cut benchmark interest rates by 50 basis points to shield the economy. Policymakers unanimously approved their biggest one-time cut and first emergency rate move since the 2008 financial crisis.

Though the market reaction to the Fed interest rate cut was negative, equities rallied for about 15 minutes after the announcement. However, worries about the Fed’s impotence in the face of economic risks from the coronavirus quickly fueled a market sell-off. Last Friday, the Fed had issued a release on the deadly virus saying that the fundamentals of the U.S. economy remain strong. At the same time, it is closely monitoring developments and their implications for the economic outlook.

While cutting rates can bolster confidence and help to keep borrowing cheap, it cannot prevent the disease from spreading or help companies deal with delayed orders or sick workers. There is also the long-standing question of how effective monetary stimulus, and even some forms of fiscal stimulus can be in the face of a supply shock. Monetary and fiscal stimulus is typically aimed at mitigating demand shocks arising from steep cutbacks in spending by households, businesses or governments. Hence, investors are likely to remain at the mercy of headlines surrounding the outbreak in coming weeks and months.

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 six stocks that made it through this screen:

Performance Food Group Company PFGC, through its subsidiaries, markets and distributes food and food-related products in the United States. The stock has added 11.4% in the past year but fell 15.3% over the past week. It has a Momentum Score of A.

YETI Holdings, Inc. (YETI - Free Report) designs and distributes products for the outdoor and recreation market in the United States, Canada, Australia and Japan. The stock has jumped 20.9% in the past year and has a Momentum Score of B. Shares of the company have lost 6.6% over the past week.

LCI Industries (LCII - Free Report) , together with its subsidiaries, manufactures and supplies components for the manufacturers of recreational vehicles and adjacent industries in the United States and globally. The stock has gained 19.5% in the past year and has a Momentum Score of B. Shares of the company have lost 6% 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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