4 Momentum Anomaly Stocks to Buy as 2020 Begins on High Note

The U.S. equity market has started 2020 on a solid footing with the S&P, the Dow and the Nasdaq hitting record highs. But this shouldn’t come as a surprise to investors given the healthy job market scenario coupled with strong consumer spending, which bodes well for economic growth.

Remarkably, the market rally kicked into higher gear as the Fed switched to cutting rates and a China trade war truce took hold. Analysts expect that corporate earnings will continue to impress on the back of robust business investment and emerging market economies. However, concerns about the impact of higher corporate taxes on profits could rise in the run-up to the U.S. presidential election. This apart, rising wages are likely to reduce profit margins over the next several years.

With that in mind, reacting emotionally to volatile trends can cause more damage to a portfolio’s return than a downturn. When value or growth investing fails to fetch sustained profits, one should explore another time-tested winning strategy that simply bets on the frontrunner stocks. This is known as momentum investing.

At the core, momentum investing is buying high, selling higher. It is based on the idea that once a stock establishes a trend, it is likely to continue in that direction. There’s a whole list of behavioral biases that most investors exhibit. For instance, there are investors who 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 mistakes. So, basically, it’s a way to profit from the general human tendency to extrapolate current trends into the future. Momentum investing is, thus, based on that gap in time, which exists before the mean reversion occurs i.e. before prices become rational again.

Here, we have created a strategy that will help investors get in on these fast movers when there is a short-term pullback in price, and rake in handsome gains.

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: No matter whether it is a good market or bad, stocks sporting a Zacks Rank #1 (Strong Buy) have a proven history of outperformance. 

Momentum Style Score of B or better: While ensuring solid momentum features, a Momentum Score of A or B knocks out a lot of the screening process, as it takes into account several factors including volume change and relative performance. 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 prices of the stocks should not be too low.

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 four of the eight stocks that made it through this screen:

Target Corporation (TGT - Free Report) operates as a general merchandise retailer in the United States. The stock has gained almost 90% in the past year and has a Momentum Score of A. Shares of the company have lost 2.2% over the past week.

The Western Union Company (WU - Free Report) provides money movement and payment services worldwide. The stock has surged 53% in the past year and has a Momentum Score of B. Shares of the company have lost 4% over the past week.

Pilgrim's Pride Corporation (PPC - Free Report) engages in the production, processing, marketing and distribution of fresh, frozen and value-added chicken products in the United States, United Kingdom, Europe, and Mexico. The stock has added more than 103% in the past year but fell 3.8% over the past week. It has a Momentum Score of B.

RH (RH - Free Report), together with its subsidiaries, operates as a retailer in the home furnishings. The stock has surged almost 80% in the past year and has a Momentum Score of A. Shares of the company have lost 7.1% over the past week.