Momentum investing can sound like performance-chasing since it involves buying top-performing stocks on the assumption that the performance will continue, writes Validea CEO John Reese in last week’s Nasdaq.
The basic philosophy, however, is to capitalize on the “emotional and irrational reaction of performance chasers by systematically identifying and buying stocks that are on the rise.” Reese refers to Fama-French data illustrating that the risk premium associated with the momentum strategy leads to long-term performance (see factor chart below).
He describes the Validea momentum strategy (which combines the investment approach with a series of fundamental factors) and explains some of its challenges. Using his guru-based, momentum-focused fundamentals, Reese identifies the following four high-scoring stock picks:
- Trinseo S.A. (TSE), a materials company that produces synthetic rubber, latex and performance plastics, earns high marks based on quarter-over-quarter growth in earnings-per-share as well as relative strength (price performance) and steadily decreasing leverage.
- Thor Industries (THO) manufactures a range of recreational vehicles in the U.S. The company has shown persistent EPS growth and a favorable ratio of price-earnings to EPS growth (PEG ratio), and the balance sheet reflects a favorable debt level.
- Ubiquiti Networks, Inc. (UBNT) develops performance networking technology for service providers and enterprises and is favored for both its 5-year average annual as well as its quarter-over-quarter EPS growth. Return-on-equity and modest leverage add appeal.
- Argan Inc. (AGX), through its subsidiaries, provides engineering, construction and operations management services as well as industrial fabrication and field services. The stock’s relative strength indicates strong price performance, and both earnings yield and return-on-equity are favorable.
Screen for fundamentally sound Momentum Stocks with Validea’s Guru Stock Screener