Top 3 Momentum Anomaly Picks as High Treasury Yields Take Toll
Despite lawmakers reaching a short-term agreement that staved off the government shutdown till mid-November, the broader equity markets mostly trended down over the past few trading days. The downtrend was primarily triggered by the market uncertainty owing to the Federal Reserve’s stance to hold interest rates steady while keeping the door ajar for another hike before the end of the year. Moreover, indications of fewer cuts next year and ‘a higher-for-longer approach to interest rates’ shifted the fulcrum in favor of the less risky asset portfolio of bonds, with Treasury yields hitting their highest levels since 2007.
While the 10-year Treasury yield hit 4.8%, the highest level witnessed in 16 years, the 30-year Treasury yield hit 4.925% – also the highest since 2007. However, the stock market partially made amends when weaker-than-expected jobs data slightly pulled back the bond yields amid signs of a soft labor market. Per the latest ADP report, 89,000 private payrolls were added last month, which was much lower than broader expectations of more than 160,000 job additions. Investors now await further clarity regarding the labor market conditions from today's Nonfarm Payrolls data for September to look for cues about the future trajectory of interest rate hikes.
With looming uncertainty, investors often seek to employ time-tested winning strategies to fetch sustained profits. One of the most successful game plans to beat the blues is to bet on momentum stocks when value or growth investing fails to generate the desired profits.
This approach primarily tends to follow the adage, “the trend is your friend.” At its core, momentum investing is “buying high and selling higher.” It is based on the idea that once a stock establishes a trend, it is more likely to continue in that direction because of the momentum that is already behind it. But before we delve deep into it, let us try to fathom why does the momentum strategy at all work?
There are several behavioral biases that most investors exhibit in their decision-making. And these emotional responses, or rather mistakes, make the momentum strategy work.
For example, some investors are anxious about booking losses and hence hold on to losing stocks for too long, hopeful of a rebound in prices. On the other hand, a few investors sell their winners way too early. Momentum investing is one of the best strategies to avoid making such errors in judgment.
Furthermore, investors initially tend to underreact to news, events or data releases. However, once things become clear, they have a habit of going with the flow and overreacting, causing dramatic price reactions. These behavioral problems extend trends, thus opening up huge opportunities for momentum players.
To sum up, momentum investing is a way to profit from the general human tendency to extrapolate current trends into the future. It is based on that gap in time before the mean reversion occurs, i.e., before prices become rational again.
In this context, stocks like Astec Industries, Inc. ASTE, Dream Finders Homes, Inc. DFH and G-III Apparel Group, Ltd. GIII are worth betting on.
Momentum strategies have been known to be alpha-generative over a long period and across market stages. So, this strategy is quite tricky to implement, as detecting these trends is no child’s play.
Here, we have created a strategy to 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: Stocks sporting a Zacks Rank #1 (Strong Buy) have a proven history of outperformance irrespective of the market conditions. 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 that include 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 three stocks out of four that made it through this screen:
Chattanooga, TN-based Astec is a leading manufacturer and marketer of road-building equipment. The company sells equipment used in each phase of road building, from quarrying and crushing the aggregate to applying the asphalt. The company also manufactures equipment for the mining, quarrying, construction and demolition industries. The stock has gained 39.1% in the past year but declined 6.9% in the past week. Astec has a Momentum Score of A.
Headquartered in Jacksonville, FL, Dream Finders engages in the homebuilding business in the United States. Through its mortgage and title joint ventures, it also provides mortgage financing and title services to homebuyers. The stock has appreciated 95.3% in the past year but lost 5.4% in the past week. Dream Finders has a Momentum Score of A.
Based in New York, G-III Apparel is a manufacturer and distributor of apparel and accessories under licensed brands, owned brands and private label brands. The company’s portfolio includes outerwear, dresses, sportswear, swimwear, women’s suits and women’s performance wear as well as women’s handbags, footwear, small leather goods, cold weather accessories and luggage. G-III has a portfolio of more than 30 licensed and proprietary brands, including five major global brands — DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger and Karl Lagerfeld. The stock has rallied 48.2% in the past year but declined 5.5% in the past week. G-III Apparel has a Momentum Score of A.
You can get the rest of 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: https://www.zacks.com/performance.
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Astec Industries, Inc. (ASTE) : Free Stock Analysis Report
G-III Apparel Group, LTD. (GIII) : Free Stock Analysis Report
Dream Finders Homes, Inc. (DFH) : Free Stock Analysis Report
