The relentless coronavirus (COVID-19) scare has pushed governments around the world to consider stimulus actions and impose restrictions on travel and public gatherings. Yet, the economic fallout is being severely felt, with several indicators declining sharply, and Wall Street predicting a recession this year.
Yesterday, the Federal Reserve said that it would offer emergency loans to money market mutual funds, its latest in a slew of steps to keep the financial system functioning. Wednesday’s volatile session trimmed 1,338.46 points off the Dow, which closed below 20,000, deep in bear market territory. The S&P plunged, triggering a market-wide temporary halt to trading before closing 5.2% down.
Moreover, oil demand and supply woes have dragged the commodity to its lowest levels in nearly two decades. Analysts say that corporate debt markets are not operating smoothly. Companies have taken advantage of record-low interest rates in recent years to load up on debt. The strategy worked well so long as short-term borrowings could be periodically refinanced. Now, some cash-strapped companies that are not earning enough to make their loan payments may struggle to roll over their debt.
The Fed is trying to protect the financial system and insulate the broader economy, where short-term pain could turn into long-term suffering if credit crunches prevent companies from obtaining the cash they need to operate, forcing them to lay off workers, delay payments to vendors and shut down factories. At this point, a coronavirus recession is inevitable. But policymakers’ response can determine how deep it is, how long it lasts, and how quickly the economy bounces back from it.
With this in mind, 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.
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 five stocks that made it through this screen:
Enphase Energy, Inc. (ENPH - Free Report) , together with its subsidiaries, develops and sells home energy solutions for the solar photovoltaic industry in the United States and globally. The stock has added a whopping 161.4% in the past year but fell 42.5% over the past week. It has a Momentum Score of A.
Cimpress plc (CMPR - Free Report) provides various mass customization services in North America, Europe, Australia, South America and the Asia Pacific regions. The stock has lost 23.3% in the past year and has a Momentum Score of B. Shares of the company have lost 34.8% over the past week.
PennyMac Financial Services, Inc. (PFSI - Free Report) , through its subsidiaries, engages in the mortgage banking and investment management activities in the United States. The stock has lost 20.5% in the past year and has a Momentum Score of A. Shares of the company have declined 49.6% 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.
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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.