As the U.S.-Iran ceasefire got a fresh lease of life with a 60-day memorandum of understanding, the broader U.S. equity markets scripted record highs driven by a tech rally. Leading benchmark indices hit all-time highs amid renewed enthusiasm in the artificial Intelligence (AI) trade. Despite the latent threat of inflation, tech stocks spurred an unprecedented market rally in May. Oil prices were quick to retreat as both the warring parties sought an amicable solution to the free passage in the Strait of Hormuz.
However, investors await the nonfarm payrolls report for further cues into the health of the labor market and the Federal Reserve policy to gauge an idea of the future stock market direction. 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 Cimpress plc CMPR, MACOM Technology Solutions Holdings, Inc. MTSI and Lumentum Holdings Inc. LITE 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.
Zacks Rank #1: Stocks sporting a Zacks Rank #1 (Strong Buy) have a proven history of outperformance irrespective of the market conditions. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 eight stocks that made it through this screen:
Based in Dundalk, Ireland, Cimpress is an online supplier of high-quality graphic design services and customized printed products to small businesses and consumers. Its product offerings include business cards, brochures and websites, and e-commerce platforms, calendars, address labels, note pads and signage, among others.
The stock has soared 122.7% over the past year but lost 3.7% over the past week. Cimpress has a Momentum Score of B.
Based in Lowell, MA, MACOM is a provider of power analog semiconductor solutions to varied markets. The company develops and produces analog radio frequency, microwave and millimeter wave semiconductor devices, and components for applications in optical, wireless and satellite networks.
The stock has surged 199.8% over the past year but lost 5.5% over the past week. MACOM has a Momentum Score of A.
Headquartered in San Jose, CA, Lumentum is a provider of optical and photonic products serving cloud, AI/machine learning, telecommunications, consumer and industrial end markets. The company’s portfolio spans semiconductor laser chips and sub-assemblies, wavelength management systems, optical modules, optical circuit switches and industrial lasers used in precision materials processing.
The stock has surged 1082.8% in the past year but declined 9.7% in the past week. Lumentum has a Momentum Score of B.
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MACOM Technology Solutions Holdings, Inc. (MTSI): Free Stock Analysis Report
Cimpress plc (CMPR): Free Stock Analysis Report
Lumentum Holdings Inc. (LITE): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).