The market has been hot lately
and my guess is that the U.S. Administration will do everything it
can to keep the market strong until next year’s election.
If I’m right, playing the
momentum game might be the best way to find winning stocks.
Rather than picking stocks
based on fundamentals, momentum players seek out stocks that have
already outperformed the overall market. Sounds counterintuitive? In
fact, already outperforming stocks are more likely than not to
continue their winning ways.
Here’s a strategy for finding
outperforming stocks with a few extra checks added to further tilt
the odds in our favor.
As usual, I’ll use the free
and user-friendly FINVIZ.com screening program to demonstrate the
process. Screening is a process that involves searching the entire
market for stocks meeting your selection criteria.
Get there by selecting
Screener from the FINVIZ homepage (finviz.com).
FINVIZ calls its selection parameters “filters.” On the Filters bar,
select “All” so that you can see all of the available filters at the
same time. Use the associated dropdown menus to select the desired
Currently, the U.S. stock
market is much stronger than other global markets, so start by
limiting your list to U.S.-based stocks by selecting “USA.” using
the Country filter.
Next, we’ll pinpoint recent
outperformers. Select “Quarter up” using the “Performance” filter
and then use the “Performance 2” filter to specify “Month Up 10%”.
Adding those two requirements limits your list to stocks that have
moved up in share price over the past three months and have gone up
at last 10% over the last 30 days. When I ran it, 830 U.S.-based
stocks met those requirements. Next, we’ll rule out the riskiest
stocks from that group.
Market capitalization, the
value of all outstanding shares, is the way most analysts measure
company size. Market caps range from a few million to $300 billion
plus for the likes of Microsoft and Wal-Mart. Research has found
that the smaller the market-cap, the riskier the stock. So use the
“Market Cap” filter and specify “+Small” to limit your list to
market-caps above $300 million.
The same concept applies to
share price, the cheaper the price, the higher the risk. So, specify
“Over $10” using the “Price” filter. Adding the Market Cap and Price
filters cut our list down to 266 stocks.
My research has found that
share prices track earnings per share (EPS) closer than any other
parameter. With that in mind, specify “over 10%” using the “EPS
Growth: Next 5 years” filter to pinpoint the fastest growers based
on analysts’ forecasts.
Next, we’ll look for stocks
that institutional buyers such as mutual funds are buying.
Institutional ownership is the percentage of a firm’s shares held by
these wired-in players, and ranges from 50% to 95% for “in favor”
stocks. So, specify “Over 50%” for “Institutional Ownership” and
“Over +5%” for “Institutional Transactions” to confirm that they are
still buying shares.
Adding those requirements cut
my list down to four stocks: Carbon Black (CBLK), DocuSign (DOCU),
INTL FCStone (INTL) and Lumber Liquidators (LL).
Successful momentum investing requires a strong stock
market. Sell all if the market turns down. Also, these stocks are
not long-term holds. Sell on any bad news.