I have written a few articles recently about factor-based investing. As I've pointed out, momentum is one of the oldest and most enduring animals in the Factor Zoo.
But what exactly is momentum? Is there a specific definition, or is momentum open to interpretation?
If you were to pose this question to a quant trader with a PhD in physics or math, she would probably say yes, momentum is a pattern of trading that can be described by specific parameters. But if you ask an old-school trader with lots of experience in the game, you would probably get a different answer.
What are some recent examples of top momentum stocks?
In this article, I'll try to describe what I think a momentum stock looks like. Then, I'll share the results of my most recent screen that looks for them. I'm not a quant with a degree in advanced math. I'm an old-school trader and portfolio manager who has been using momentum as I define it as part of my multi-factor screening algorithm for more than 20 years.
As powerful as momentum is, it's not a panacea. To capture the alpha that's available from momentum stocks, you have to include other factors, like valuation, earnings growth, and sponsorship, to the mix. Picking stocks based on price momentum alone is risky. You're essentially making a bet that what has been happening in the recent past will continue to happen in the future. That's not necessarily a wrong assumption, but it opens you up to major losses when it turns out that the momentum was based on pure speculation rather than something more fundamental and durable.
My home-grown methodology
I begin with the most basic aspect of momentum: price. To do this, I look at several moving averages to find stocks that are in strong uptrends over time. I compare the current price to the 10-day moving average, the 10-day to the 20-day, the 20-day to the 50-day, and the 50-day to the 200-day.
If a stock passes at least 3 out of 4 of these hurdles, meaning the short-term price is higher than the longer-term moving average, it makes it past my initial screen. But the resulting list is full of names that have been on price runs that are not grounded in fundamentals. So, I impose a fundamental screen to filter them out.
The fundamental screen
Included in this screen are things like increasing revenues and earnings, increasing free cash flow, increasing analyst estimates, analyst upgrades, and fund sponsorship. I screen out any names that are weak, or even below the median for their industry group.
The technical screen
This screen looks at things like on-balance volume, gap-up openings, and key reversals (stock trades significantly lower early in the day, and then rallies on high volume to close higher). It also looks for stocks that are within 5% of their 52-week high price.
After all this, I end up with a list of stocks that are not only showing price momentum, but are also more likely than not to continue the trend.
The top momentum stocks over the last 5 years
The table below shows the following. Stock name, ticker, current price, 200-day moving average, proximity to the 52-week high, price change over the most recent 4 weeks, the total percent premium above each of the 4 moving averages, momentum score (ranking from 1 to 10, with 10 being the highest, based on the momentum scores of all 6000 stocks in the database).
The top 50 momentum stocks with positive fundamental and technical scores
The top 50 momentum stocks with weak fundamental and technical scores
How to trade them
If you are a regular, long-only stock picker, stick to the first list. They are most likely to stay on trend. If you are a long/short investor, go long the first list and short the second. Not the entire list, obviously, but just the names that have passed your own due diligence.
Disclaimer: Nothing in this article should be construed as a recommendation to buy or sell any of the stocks listed. This is a preliminary list that you should investigate further.
This article was written by
Erik Conley
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Trader, analyst & portfolio manager, from 1975 - 2001. Former head of equity trading at Northern Trust Co. in Chicago. Now a private investor, founder of a nonprofit investor advocacy firm, and private investing coach. It gives me great satisfaction to teach retail investors the same skills and strategies that I used with my high net worth clients as a private wealth manager. It may be a cliche, but giving something back to the community is more rewarding to me than helping very rich people get even richer.
