The broader U.S. equity markets declined over the past three trading days as oil prices climbed and sovereign bond yields surged to multi-decade highs. The downtrend was largely triggered by stalled negotiations between the United States and Iran, leading to heightened uncertainty in the region. With President Trump further claiming that the naval blockade in the Strait of Hormuz will continue, any possible solution to the stalemate appeared to be fading.
However, solid economic growth and a relatively strong earnings season portrayed a silver lining for stocks. Amid the vagaries of the market, 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, like Plexus Corp.PLXS, Twilio Inc.TWLO and MACOM Technology Solutions Holdings, Inc.MTSI, 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. 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.
Momentum strategies have been known to be alpha-generative over a long period and across market stages. Therefore, this strategy is quite tricky to implement, as detecting these trends is not easy. 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 long-term price momentum and a short-term pullback in price.
Screening Parameters for Momentum Anomaly Stocks
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.
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 of the seven stocks that made it through this screen:
Neenah, WI-based Plexus is a provider of electronic contract manufacturing services to original equipment manufacturers (OEMs) in a wide range of industries, including Healthcare/Life Sciences, Industrial and Aerospace/Defense sectors. The company provides most of the manufacturing services on a turnkey basis. Plexus also provides after-market services to support customers in all regions where it operates.
The stock has gained a stellar 93.3% over the past year but lost 6.4% over the past week. Plexus has a Momentum Score of B.
Headquartered in San Francisco, Twilio provides a cloud-based customer engagement platform that enables developers and businesses to build, scale and operate real-time communications within software applications. The company offers highly customizable application programming interfaces, or APIs, for messaging, voice, email, video, authentication and identity. It also provides software products for digital engagement centers, marketing campaigns and customer data management. These capabilities allow customers to embed communications directly into applications and websites and manage interactions across the customer journey.
The stock has surged 124.6% over the past year but declined 9.3% over the past week. Twilio has a Momentum Score of A.
Based in Lowell, MA, MACOM is a provider of power analog semiconductor solutions to varied markets. The company develops and produces analog radio frequency (RF), microwave and millimeter wave semiconductor devices, and components for applications in optical, wireless and satellite networks.
The stock has surged 142.1% in the past year but declined 2.4% in the past week. MACOM has a Momentum Score of B.
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