• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing

Momentum Investing Is Still Alive: 5 Stock Picks That Could Benefit

Most of these names have exhibited exceptional price strength.
By JOHN REESE
Jun 26, 2017 | 03:04 PM EDT
Stocks quotes in this article: ANET, HSKA, HDSN, ESNT, PAYC

On the face of it, the idea of momentum investing runs counter to the first commandment of investing: buy low, sell high. By definition, a momentum strategy requires riding the wave of a well-performing stock -- holding on to "winners" and selling "losers" -- a notion that the wise investor might interpret as a knee-jerk, emotional, "hot potato" reaction to market information. Couple that with the fact that momentum investing has shown disappointing returns over the past decade, and you might sour on the idea altogether.

But don't jump the momentum ship just yet.

Janet Brown is president of FundX Investment Group and editor of the firm's NoLoad FundX newsletter, which offers mutual fund recommendations to clients. In a recent Wall Street Journal article, Mark Hulbert (of Hulbert Financial Digest) reports that the momentum-geared funds recommended by the newsletter were the top earners for the 25 years through 2007, but have "since lagged behind the market by 3.1 annualized percentage points." However, periods of underperformance are a fact of life with most (if not all) investment strategies.

Over the long term, momentum has performed well. Hulbert cites Fama-French data showing that, from 1927 through March 31 of this year, "the top decile momentum portfolio beat the S&P 500 by 6.6 annualized percentage points (before transaction costs)." Brown's firm stands by the momentum approach, says Hulbert, and "doesn't believe the strategy has permanently lost its market-beating potential."

In a 2014 paper titled "Fact, Fiction and Momentum Investing," AQR's Cliff Asness and a group of his colleagues set about to debunk numerous "myths" concerning momentum investing, including those concerning its reliability as a direct factor, limitations due to trading costs, and the strategy's high turnover compared to other strategies. An excerpt of the paper's introduction reads as follows:

"Please note, of course, that we make no claim that momentum works all the time. In fact, of late (this year and the last few years), momentum as a strategy has had a more difficult time. Still, the fact is momentum is a risky variable factor (as they all are) with an impressive long-term average return that survives all the attack (myths) hurled against it."

One factor that could threaten the efficacy of a momentum strategy is a heavy inflow of funds, but this doesn't seem to be occurring. Hulbert's article cites findings by Yale University finance professor (and AQR principal) Tobias Moskowitz that showed no "overwhelming increase over the past couple of decades in the amount of money invested in the highest-momentum stocks," and that he has "seen no evidence that there has been any change in investor psychology that would call into question momentum's long-term potential."

Since 2003, I've been running a model portfolio on Validea that utilizes momentum, both at the stock and industry level. While this momentum model incorporates a host of other investment measures, it seeks out strong price performers by looking for stocks with a relative strength above 80 and also near-term price momentum by seeking out those issues that have outperformed the market over the last four months. In addition, the model rewards stocks in industries where there is price momentum across more than one stock, indicating that the overall industry has some wind at its back.

I run portfolios that are rebalanced monthly, quarterly and annually, and as you my suspect with a momentum-focused approach, more frequent portfolio rebalancing and review tends to lead to better performance. The Momentum portfolio (10-stock, rebalanced monthly) has returned 268.9% and has outperformed the market by 125.5%. In 2016, it returned 15.0% versus the S&P 500's 9.5% gain and, year-to-date, it has grown by 14.1% compared to 8.8% for the S&P.

Each of the stocks below passes the Momentum Investor model on Validea as well as other strategies I run, which are based on the stock-picking methods of legendary investors such as Peter Lynch, Joel Greenblatt and Warren Buffett.

Keep in mind, most of these are small-cap names and have exhibited exceptional price strength so you should only consider buying these in the context of a diversified portfolio and also understand these stocks may be quite volatile both to the up and downside.

1. Arista Networks, Inc. (ANET) is a supplier of cloud-networking solutions that use software innovations to address the needs of internet companies. The company earns a perfect score under our Validea Momentum investment strategy due to a more than doubling in earnings-per-share growth over the most recent quarter, and earnings growth over the past five years of 36.23% (anything above 25% is considered exceptional by this model). The recent share price of around $158 falls within 15% of its 52-week high, another positive sign.

The company is also favored by our Martin Zweig-based investment strategy due to the fact that revenue growth (50.98%) exceeds earnings growth (48.76%), a requirement of this screen. EPS has increased each year over the last five years, which adds appeal.

2. Heska Corporation (HSKA) sells veterinary diagnostic and specialty products, and earns high marks from our Momentum stock screening model based on its five-year average EPS growth of 28.86% as well as its price performance compared to the overall market, as evidenced by relative strength of 97 versus the minimum requirement of 80.

The company also scores well under our Motley Fool-inspired investment strategy, which likes its after-tax profit margin (trailing 12-month basis) of 11.27% compared to the minimum requirement of 7%. This screen also favors the company's debt-free balance sheet and the stable level of research & development spending, which allows it to maintain and improve products and technology.

3. Hudson Technologies Inc. (HDSN) is a small-cap refrigerant services company that earns high marks from our Motley Fool-based investment methodology due to its after-tax profit margin of 11.56% (based on trailing 12-month results), well above the minimum requirement of 7%. The stock's relative strength of 96 is considered favorable versus the minimum requirement of 90, and long-term debt is low compared to equity (0.11%).

Our Momentum stock screening model likes the average annual earnings growth over the last five years of 48.43%, nearly twice the best-case level of 25%.

4. Essent Group Ltd. (ESNT) is a private mortgage insurance company that earns a perfect score under our Momentum investment strategy due to most recent quarter-over-quarter EPS growth of 38.46%, more than double the minimum requirement of 18%. The recent share price of around $36 is within 15% of the 52-week high, another positive sign under this model, and return-on-equity of 18.6% exceeds the 17% minimum required to pass this screen.

The company also earns high marks from our John Neff-based investment methodology for its sales growth of 63.1% and positive free cash flow of $2.93 per share.

5. Paycom Software, Inc. (PAYC) is a provider of a cloud-based human capital management (HCM) software solutions that provide functionality and data analytics to manage the employment life cycle from recruitment to retirement. The company earns a perfect score under our Momentum investment strategy for its quarter-over-quarter growth in EPS of 37.50%, well above the minimum requirement of 18%.

The recent share price of about $72 falls within 15% of the 52-week high, a plus under this model. Return-on-equity of 38.4% is more than double the required minimum of 17%.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, John Reese and/or his private clients were long all stocks mentioned in this article.

TAGS: Investing | U.S. Equity | How-to | Stocks

More from Investing

These 2 Crown Jewels of the Electric Vehicle Industry Remain Private

Timothy Collins
Jan 20, 2021 12:10 PM EST

They are Rivian and Lucid, with Chanje close behind.

It's Not All Fun and GameStop

Bruce Kamich
Jan 20, 2021 11:45 AM EST

The charts of GME still look risky to me, and here's the price I'm watching.

Nasdaq Reclaims Its Uptrend

Guy Ortmann
Jan 20, 2021 11:00 AM EST

Market psychology and valuation continue to show warning signs.

3M and Mastercard Continue to Trade Sideways

Bruce Kamich
Jan 20, 2021 10:55 AM EST

Both stocks may eventually do better when investors sense that the economy is indeed going to do better.

The Market Trend Is Still Our Friend

James "Rev Shark" DePorre
Jan 20, 2021 10:36 AM EST

The folks that are waiting for the market collapse are going to have to keep waiting.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:38 AM EST CHRIS VERSACE

    Best Stocks to Buy for the Biden Presidency

    President-elect Biden's massive stimulus plan, int...
  • 08:07 AM EST GARY BERMAN

    Wednesday Morning Fibocall for 1/20/2021

    SPX (Long-Term View) The 1/8/21 high @ 3826.69 i...
  • 11:09 AM EST GARY BERMAN

    Is Copper About to Turn to Rust?

    Below is a very long-term copper chart.  As you...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login