Six Keys to Find Momentum Stocks
Unlocking the Secrets to Momentum Stock Trading
Momentum stock trading is a time-tested method for accumulating great wealth in the stock market. During the 1990s, for example, Clear Channel Communications went up 5,615%, Emulex rose 6,412%, Dell Computer surged 10,198%, Activision climbed 13,819%, and Semtech soared 15,231%.
It is not uncommon to find stocks that accelerate in price, yielding 100% to 300% returns in less than a year or even in a few months. However, for novice investors, identifying such stocks can be a perplexing and frustrating endeavor.
While many momentum stock traders have different criteria for pinpointing future winners, there are typically six key steps in screening for a big winner:
- Accelerating earnings or EPS (earnings per share).
- Annual earnings up 25% or more in the last 3 years.
- Minimum volume of 100,000 or at least increasing volume.
- A 17% ROE (return on equity) or better.
- Has a leadership role in the marketplace.
- Price at an all-time high.
Criteria for Momentum Stocks
Potential momentum stocks should exhibit strong fundamentals and demonstrate growth at an accelerated rate. Selecting stocks with high EPS ratings and accelerating growth rates over previous quarters ensures that you are investing in companies with above-average growth. Wall Street rewards quickly growing earnings with institutional sponsorship from big funds, further driving up share value.
Momentum stocks must also prove themselves as strong players in their market by showing robust annual earnings. A stock with less than a 25% annual increase in earnings is unlikely to attract significant interest from major mutual funds or investors, leading to stagnation or slow price growth.
Stocks under consideration should have a daily average volume of 100,000 shares or show an increasing volume trend as the stock's value rises. Lower volumes indicate little interest from the investment community, potentially leading to liquidity issues if you need to sell quickly.
Evaluating ROE and Market Leadership
A potential momentum stock should have a return on equity (ROE) of 17% or better. ROE, calculated as net income divided by shareholders' equity, indicates the responsible return on investors' capital. A higher ROE is favorable for investors, making this one of the most critical attributes for any stock investment.
Momentum stocks also tend to be market leaders. When major indices decline, true stock leaders maintain their highs or achieve new ones. These leaders typically spearhead market rallies, making new highs and outpacing the overall market.
All-Time Highs and Technical Entries
Momentum stocks should be trading at their all-time highs. Buying at these levels, particularly at key technical entry points, allows investors to ride the trend as the stock price increases. This strategy improves the chances of profitability, as an uptrend is six times more likely to continue, putting the odds in your favor.
You can search for stocks meeting these criteria on platforms like Yahoo Finance or MSN Money for free. Keep a list of potential candidates and track their performance. With practice, you'll be able to identify stocks that go on to make significant moves.
As with all types of investing, remember to cut your losers quickly and let your winners ride with a sound money management plan. Good luck and good trading!
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