Harry Domash's Winning Investing



Playing the Momentum Game

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. What’s that?

About Momentum

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.

Best Free Stock Screener

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 filter values.

Basic Momentum Screen

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.

Momentum Screen Results

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.  

published 9/17/19

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