Play The Momentum With These 5 Fast-Paced Stocks

When value or growth investing fails to fetch sustained profits, one should explore another time-tested winning strategy that simply bets on the frontrunners.

In other words, one of the most successful strategies today is to invest in momentum stocks at the right time.

Momentum is basically the tendency of winning stocks (i.e. stocks that have outperformed the market in recent times) to keep winning and losing stocks to keep losing. It is based on the idea that once a stock establishes a trend, it is more likely to continue in that direction.

At the core, momentum investing calls for investors to “Buy High, Sell Higher.” Thus, this strategy calls for hitching a ride on a fast-moving train, without fretting about valuations or growth prospects.

How Does Momentum Strategy Work?

There is a simple reason to this. It works because we are humans!

There’s a whole laundry list of behavioral biases that most investors exhibit, and these emotional responses and mistakes are the very reason that momentum strategy works. For instance, we all know of investors who are afraid to book losses, and hence hold onto losing stocks for too long, hoping that they will spring back to their original prices. On the other hand, investors sell their winners way too early.

Furthermore, investors initially tend to under-react to news, events or data releases. However, once things gain clarity, they tend to go with the flow and overreact, causing dramatic price reactions.

These behavioral problems extend trends, and thus open up huge opportunities for momentum players. So basically, it’s a way to profit from the general human tendency to extrapolate current trends into the future.

Momentum investing is based on that gap in time that exists before the mean reversion occurs, i.e. before prices become rational again.

Chase the Alpha

Momentum strategies have been known to be alpha-generative over long periods of time and across markets. So obviously, this strategy is quite tricky to implement, as detecting these trends is no child’s play.

Here, we have created a strategy that will help investors get in on these fast movers and make handsome gains. Our screen will help you advantage from both long-term price momentum and a short-term pullback in price, which would reflect some profit-taking in the stock.

Screening Parameters

Percentage Change Price (52 Weeks) = Top #100: This item selects the top 100 stocks with the best percentage price change over the last 52 weeks. This parameter ensures we get stocks that have appreciated the maximum over the past one year.

Percentage Change in Price (1 Week) = Bottom #50: From the above 100 stocks, we then choose those that are also among the 50 worst performers over a short one-week period.

Zacks Rank #1: No matter whether the market conditions are good or bad, stocks with a Zacks Rank #1 (Strong Buy) have a proven history of outperformance. You can see Zacks Investment Research

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Written By: Zacks Investment Research