Build a Strong Portfolio With These Momentum Anomaly Stocks

Zacks Equity Research
·6-min read

Famous investor, Warren Buffett, once said about the stock market “Be fearful when others are greedy and greedy when others are fearful.” A bearish market provides the best opportunities for investors as they can get their favorite stocks at a discounted price. Remember that the secret to making money, regardless of market conditions, is to buy stocks that have been burned but still have the potential to soar.

Preferably, one should stick with long-term investing strategies and buy fundamentally strong companies to build wealth.

Of late, investors have started panicking as volatility returned to Wall Street. This volatility is going to persist, at least till Nov 3, the presidential election day. Rising tensions between the United States and China make the setting even more uncertain. Adding to this is the question of how soon drug makers will be able to develop a coronavirus vaccine. And of course, developments on the potential new fiscal stimulus will be another key area.

Meanwhile, it will be great to see investors’ patience getting rewarded, provided the bets are right.

Reacting hastily to volatile trends can cause more damage to one’s portfolio returns than an actual downturn. When value or growth investing fails to fetch sustained profits, one should explore another time-tested winning strategy that simply bets on frontrunner stocks. In short, one of the most successful strategies today is to get in on momentum stocks at the right time.

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 more likely to continue in that direction than move against the drift. But why does the momentum strategy work?

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, some investors are anxious about booking losses and hence hold on to losing stocks for too long, hopeful of a rebound in prices. Meanwhile, a few investors sell their winners way too early.

Furthermore, investors initially tend to underreact to news, events or data releases. However, once things become clear, they tend to go with the flow and overreact, causing dramatic price reactions.

These behavioral problems extend trends, thus opening 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 strategies have been known to be alpha-generative over a long period and across market stages. 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 rake in handsome gains. Our screen will help you benefit from both long-term price momentum and a short-term pullback in price.

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 market conditions are good or bad, stocks sporting a Zacks Rank #1 (Strong Buy) have a proven history of outperformance. 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, including 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 the four stocks that made it through this screen:

RH RH is a curator of design, taste and style in the luxury home furnishings market. The stock has soared 107.5% in the past year but has lost 7.5% in the past week. It has a Momentum Score of A.

Headquartered in Medford, OR, Lithia Motors, Inc. LAD is a leading provider of personal transportation solutions in the United States. The stock has rallied 69.6% in the past year and has a Momentum Score of B. Shares of the company have declined 5.8% in the past week.

DICK'S Sporting Goods, Inc. DKS is a leading omni-channel sporting goods retailer that offers an extensive assortment of authentic, high-quality sports equipment, apparel, footwear and accessories. The stock has added 37.7% in the past year and has a Momentum Score of B. Shares of the company have lost 6.4% in the past week.

Based in Edinburg, VA, Shenandoah Telecommunications Company SHEN provides a broad range of diversified communications services through its wireless, cable and fiber optic networks to customers in the Mid-Atlantic United States. The stock has gained 39% in the past year but has lost 6.7% in the past week. It has a Momentum Score of A.

You can get the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your trading. Further, you can also create your own strategies and test them first before taking the investment plunge.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

Click here to sign up for a free trial to the Research Wizard today.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at:

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DICKS Sporting Goods, Inc. (DKS) : Free Stock Analysis Report
Lithia Motors, Inc. (LAD) : Free Stock Analysis Report
RH (RH) : Free Stock Analysis Report
Shenandoah Telecommunications Co (SHEN) : Free Stock Analysis Report
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