3 Stocks With Momentum Anomaly To Buy Amid Coronavirus Scare
Zacks Investment Research | Feb 02, 2020 08:59PM ET
The Coronavirus epidemic, which originated in China, seems to have stumped the U.S. market rally that gave us spectacular gains last year, and pushed the major indexes to all-time record highs just a couple of weeks back. Market bulls see the current slowdown as nothing more than a temporary breather that will allow investors to take stock of the problem before resuming the surge. The other side of the divide is less optimistic about what’s happening in the market and sees this as the catalyst that will result in a long overdue market downturn.
On the other hand, China’s central bank said that it will pump $174 billion worth of liquidity by way of reverse repo as the stock market reopens on Monday. Investors are bracing for a volatile session when onshore trades resume after a break for the Lunar New Year, which was extended by the government. China’s stock, currency and bond markets have been closed since Jan 23.
Notably, the U.S. GDP growth has remained in the 2%-plus range over the last few quarters despite trade-centric uncertainties weighing on the factory sector. Economic growth should improve with the easing of trade issues following the signing of phase one of the U.S.-China trade deal, and the USMCA trade deal.
Earnings growth was anemic in 2019, primarily because of the tough comparisons to the all-time record corporate profits the year before, which had received a boost from the tax cut legislation. But growth is likely to resume in the first quarter of 2020, and accelerate in the second half of the year. Analysts expect company earnings to impress on the back of robust business investment and emerging market economies.
However, concerns about the impact of higher corporate taxes on profits could rise in the run up to the U.S. presidential election. This apart, rising wages are likely to reduce profit margins over the next several years. The Fed left interest rates unchanged last week and will likely remain on the sidelines for now. But, the outlook beyond the U.S. shores is a lot less positive, with concerns about growth momentum in China, India, Germany and other key markets.
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.
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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 Original post
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