3 Stocks Witnessing Momentum Anomaly Amid Covid-19 Outbreak
Zacks Investment Research | Feb 17, 2020 08:35PM ET
The most valuable U.S. company Apple Inc.’s (NASDAQ:AAPL) 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.
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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.
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