Profit from Hordes, Swarms & Flocks - Investment Ideas
17 Août 2011 - 2:00AM
Zacks
When I think of “hordes,” I imagine mass armies of Barbarians
pouring in and looting Rome. “Swarms” remind me of thousands of
teeming bees rushing out of a hive. And on numerous occasions, I’ve
seen “flocks” of crows aggressively attacking lone hawks. Does this
aggressive mob behavior exist in the stock market? And is there
power in a teeming sea of investors? You betcha!
As it pertains to the stock market, this effect is called Momentum
investing. Momentum investing is the approach of buying stocks that
have had price increases over a period of a few months to a year.
Essentially, it is a bandwagon effect. As investors see a stock
going up, they are quick to buy, and more investors follow suit.
It’s like following a crowd and there is comfort in numbers when it
relates to stock investing. Would you feel more comfortable buying
a stock that’s going up or down? Exactly!
Furthermore, Momentum investing is considered a Market Anomaly
because the effect mystifies economists that believe the market is
efficient. Since they think the market fully reflects all
information and, therefore, profits above market returns do not
exist, it should thus follow that excess returns cannot be made
simply by purchasing stocks that have had high recent returns.
Luckily for you and me, the Momentum Anomaly is alive and well.
Here’s proof. Let’s use the S&P 500 as the benchmark for the
market return and build a portfolio of the ten S&P 500 stocks
that have had the best performance over the previous 52 weeks. From
January 2000 until July 15, 2011, the ten stocks that had the best
performance prior to portfolio formation had a compounded annual
return of 18.7% compared to the S&P 500’s 0.8%. These results
indicate that investing hordes, swarms and flocks have a
significant amount of power and following trends can actually lead
to outperforming the market.
You may be wondering, “Is there a drawback to jumping on the
bandwagon?” Well, yes there is. Sometimes crowds panic and stampede
in the opposite direction. This reversing of direction can lead to
high amounts of volatility in a portfolio. The annualized
volatility of the S&P 500 has averaged about 18% over the last
11 years while the portfolio of the ten highest Momentum stocks of
the S&P 500 had an average annualized volatility of 34%. So our
sample Momentum portfolio had about twice the volatility of the
market, but also about 23 times the return. Just be aware hordes
are going to win over time, even if they can be a bit fickle.
Here’s a method for finding stocks to take advantage of the
Momentum Anomaly:
- First, create a liquid, investible set of the stocks with
the largest 3000 market values and average daily trading
volume greater than or equal to 100,000 shares. (If there's not
enough liquidity, it’ll be hard for you to trade it.)
- Next, due to the uncertainty regarding some foreign issues,
keep only U.S. common stocks. (There’s some bad stuff out
there, so let’s avoid it.)
- Add another filter by selecting those stocks with a Zacks
Rank <= 3. (Let’s be a little smart about Momentum and
require the stock to be at least moderately, if not highly,
rated.)
- Finally, select the top 10 stocks with the highest return over
the past 52 weeks.
Here are 5 great Momentum stocks (08/15/11):
CVR Energy, Inc.
(CVI)
CVR Energy refines and markets transportation fuels in the US. Two
weeks ago, CVR produced record quarterly results. Hedge funds are
buying this stock, which remains a good value for its price.
Select Comfort Corporation
(SCSS)
Select Comfort manufactures, markets and distributes
adjustable-firmness beds. Select Comfort has been growing in every
way (sales, income, margins, cash flow), and investors feel there’s
room for even greater growth.
W&T Offshore Inc.
(WTI)
W&T Offshore engages in the acquisition, exploitation, and
exploration, and development of oil and natural gas. Analysts love
this company and its stock price has shown a good uptrend.
Buckeye Technologies Inc.
(BKI)
Buckeye Technologies manufactures and distributes paper products
for use in various applications. Buckeye recently completed its
best fiscal year ever. Earnings, sales, cash flow and dividends are
all on the upswing.
Stone Energy Corp.
(SGY)
Stone Energy is another company that engages in the acquisition,
exploitation, and exploration, and development of oil and natural
gas and is a good play on rising oil prices. Earnings at this
company have beaten expectations the last three quarters and the
stock remains a good value.
In conclusion, the next time you see a mass of barbarians racing
toward the castle waving flares, go right a head and take up your
torch. But remember, when Momentum investing works, it works
extremely well. When it doesn’t, you need to be the one closest to
the gate.
To learn more about the Momentum Anomaly, visit a website dedicated
to the explanation and discussion of market anomalies:
hema.zacks.com.
BUCKEYE TECH (BKI): Free Stock Analysis Report
CVR ENERGY INC (CVI): Free Stock Analysis Report
SELECT COMFORT (SCSS): Free Stock Analysis Report
STONE ENERGY CP (SGY): Free Stock Analysis Report
W&T OFFSHORE (WTI): Free Stock Analysis Report
Zacks Investment Research
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