Read the Beforeitsnews.com story here. Advertise at Before It's News here.
Profile image
By Stockopedia (Reporter)
Contributor profile | More stories
Story Views
Now:
Last hour:
Last 24 hours:
Total:

Hunting for momentum stocks in a weak market

% of readers think this story is Fact. Add your two cents.


In a recent article I looked at the idea of screening for cyclical value in sectors such as energy, mining and industrials. I concluded that some opportunities may be starting to emerge, but that they’re only likely to be of interest for investors with fairly long timeframes.

This week, I want to spend time building a screen to identify stocks that may have the potential to deliver more immediate gains – stocks with strong momentum.

Investing in momentum stocks means following the trend. But there’s more to it than this. There’s ample academic evidence to support the view that price trends and earnings upgrades can drive outperformance over 6-12 month periods.

This chart shows how stocks with stocks with high-decile MomentumRanks have outperformed the FTSE All Share index since 2013:

Admittedly, it’s tempting to think that the current market is unlikely to provide many momentum opportunities. Rising interest rates may also dampen down investor enthusiasm for nosebleed valuations.

The FTSE 250 and SmallCap index are both down more than 15% this year, despite the recent rally. AIM has fared even worse:

However, as Ed commented in October, “there’s rarely a bear market everywhere all the time”. The oil and gas sector has been one bright spot this year, but there are other winning sectors and companies, too.

A review of the main UK stock indices reveals that they all have a healthy number of risers, on a year-to-date view (as of 14/11/22):

Index

# YTD risers

% of index

FTSE 100

27

27%

FTSE 250

48

19%

FTSE SmallCap

32

14%

AIM All-Share

139

18%

There’s a clear trend here in the right-hand column, which shows the percentage of index constituents that have risen this year. Bigger firms have done better.

Of course, past performance is no guarantee of future success. Buying shares merely because they’ve already risen is unlikely to be a winning strategy. There are also reasons to be wary of momentum-driven investing during times of economic turbulence. Academic literature has shown us time and again that momentum stocks are outperformers during a downturn, but material underperformers when markets recover – a theme we explored more in this article.

What I want to do in this article is identify stocks with the momentum qualities that are statistically more likely to drive outperformance across a basket of stocks, while the wider market remains on its downward streak.

Momentum Screen: criteria

I’m going to use Stockopedia’s MomentumRank as the foundation of my screen. The chart above shows how effective this has been over the last nine years. This mirrors my personal experience – I’ve often found this score to be a useful guide to the near-term price trend of a stock.

However, at the time of writing, the Top MomentumRank page returns 134 stocks with a MomentumRank of at least 90. That’s still too many for me to consider.

I’d like to narrow down my investment universe a little more than this before starting to do any detailed research. I’d also like to add a few extra criteria in order to eliminate companies I’m not interested in for other reasons, such as valuation.

Here are the screening criteria I’ve used in my screen. I’ve included a detailed explanation below, explaining the thinking behind each rule:

Market cap gt;£25m - I want to avoid micro caps that may be illiquid and hard to trade.

MomentumRank gt;80 - if you’re not familiar with the internal workings of this proprietary score, you can find a full explanation here. In short, the ranking algorithm divides momentum into two sets of factors:

  • Price momentum: price vs 52wk high, 50d/200d moving average and relative strength
  • Earnings momentum: EPS estimate upgrades, recent earnings and broker upgrades

Absolute price change gt;0% - the trend is your friend. I don’t want to find myself betting on the reversal of a falling share price trend.

Quality amp; Value: The factors in the MomentumRank should already provide me with a solid foundation that excludes most highly speculative stocks.

However, I’ve also decided to specify baseline levels of profitability and value. By doing this, I hope to eliminate stocks that are relying on turnarounds or unproven business models to deliver further gains.

PEG ratio TTM lt;1.2 - I find the price/earnings growth ratio to be a useful way to sanity check a stock’s valuation, relative to expected earnings growth.

If the PEG ratio is too high, there’s a danger that all of the good news is already in the price. I’ve used an upper limit of 1.2 in my SIF folio screen for many years and found it effective, without being too restrictive.

Rolling P/E lt;25 – in a similar vein, I want to try and ensure that the valuation of any shares I consider is not completely divorced from reality. The rolling P/E blends last year’s earnings with current year forecast earnings, giving a regularly-refreshed estimate of a stock’s likely valuation.

Earnings yield TTM gt;0% - this measure compares EBIT or operating profit with a company’s enterprise value. If a stock has a positive TTM earnings yield, it means that the underlying business was profitable at an operating level over the last 12 months.

I’ve included this measure because I’m not interested in owning companies that are operating at a loss.

Screen construction tip: When building a screen, it can be hard to know how much impact each rule is having. What I tend to do is to deactivate each rule in turn, to see how the results change. You don’t have to delete a rule to do this, just clear the checkbox that’s next to the delete button:

Screen results

You can see this Momentum screen here. At the time of writing, this screen offers up 43 results. I’ve sorted these by MomentumRank:

Not all of these are stocks I’d consider buying, but there are certainly a good number that look potentially interesting to me, including one or two I already own. In a future piece I’ll drill down more closely into one or more of these stocks.

As always, I’d love to hear your views on my screening criteria and on momentum opportunities in today’s market. Please drop your thoughts in the comments below to share your views.

Stockopedia


Source: https://www.stockopedia.com/content/hunting-for-momentum-stocks-in-a-weak-market-957167/


Before It’s News® is a community of individuals who report on what’s going on around them, from all around the world.

Anyone can join.
Anyone can contribute.
Anyone can become informed about their world.

"United We Stand" Click Here To Create Your Personal Citizen Journalist Account Today, Be Sure To Invite Your Friends.

Please Help Support BeforeitsNews by trying our Natural Health Products below!


Order by Phone at 888-809-8385 or online at https://mitocopper.com M - F 9am to 5pm EST

Order by Phone at 866-388-7003 or online at https://www.herbanomic.com M - F 9am to 5pm EST

Order by Phone at 866-388-7003 or online at https://www.herbanomics.com M - F 9am to 5pm EST


Humic & Fulvic Trace Minerals Complex - Nature's most important supplement! Vivid Dreams again!

HNEX HydroNano EXtracellular Water - Improve immune system health and reduce inflammation.

Ultimate Clinical Potency Curcumin - Natural pain relief, reduce inflammation and so much more.

MitoCopper - Bioavailable Copper destroys pathogens and gives you more energy. (See Blood Video)

Oxy Powder - Natural Colon Cleanser!  Cleans out toxic buildup with oxygen!

Nascent Iodine - Promotes detoxification, mental focus and thyroid health.

Smart Meter Cover -  Reduces Smart Meter radiation by 96%! (See Video).

Report abuse

    Comments

    Your Comments
    Question   Razz  Sad   Evil  Exclaim  Smile  Redface  Biggrin  Surprised  Eek   Confused   Cool  LOL   Mad   Twisted  Rolleyes   Wink  Idea  Arrow  Neutral  Cry   Mr. Green

    MOST RECENT
    Load more ...

    SignUp

    Login

    Newsletter

    Email this story
    Email this story

    If you really want to ban this commenter, please write down the reason:

    If you really want to disable all recommended stories, click on OK button. After that, you will be redirect to your options page.