3 Momentum Anomaly Stocks to Buy on Solid Earnings Rally

Buoyed by a solid earnings performance from hitherto reported companies, the broader equity market has witnessed a steady uptrend over the past few trading days. The better-than-expected corporate earnings, primarily driven by the banking sector, allayed the fears of recession from the near-term horizon and instilled optimism. The markets were further boosted by the Federal Reserve’s decision to hit a pause button in its aggressive rate hike regime to maintain its benchmark interest rate in the range of 5-5.25%. This propelled the stock market rally as investors largely expect the rate-hiking cycle to be nearly over, although the Fed indicated that two more hikes are likely to occur later this year.

The focus has now shifted to the Fed’s Jul 25-26 policy meeting, which is expected to be another potential market catalyst. With uncertainty becoming the norm of the day, 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, are the very reason that makes 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 HCA Healthcare, Inc. HCA, Hubbell Incorporated HUBB and Nu Holdings Ltd. NU 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 of the six stocks that made it through this screen:

Headquartered in Nashville, TN, HCA Healthcare operates hospitals and related healthcare entities. It is the largest non-governmental operator of acute care hospitals in the United States. HCA Healthcare operates 180 hospitals and approximately 2,300 ambulatory sites of care, including surgery centers, freestanding emergency rooms, urgent care centers and physician clinics in 20 states and the United Kingdom. The stock has gained 62% in the past year but declined 1.7% in the past week. It has a Momentum Score of A.

Based in Shelton, CT, Hubbell is a leading manufacturer of utility and electrical solutions, enabling customers to operate critical infrastructure safely, reliably and efficiently. Its product portfolio includes plugs, receptacles, connectors, lighting fixtures, high voltage test and measurement equipment and voice and data signal processing components. The stock has appreciated 75.3% in the past year but jumped just 1.3% in the past week. It has a Momentum Score of A.

Founded in 2013 and headquartered in Sao Paulo, Brazil, Nu Holdings provides digital banking platform and digital financial services in Brazil, Mexico, Colombia and internationally. The company leverages proprietary technologies and innovative business practices to create new financial solutions and experiences for individuals and SMEs that are simple, intuitive, convenient and low cost. The stock has rallied 65.4% in the past year but is down 2.2% in the past week. Nu Holdings has a Momentum Score of A.

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.

Nu Holdings Ltd. (NU): Free Stock Analysis Report

HCA Healthcare, Inc. (HCA): Free Stock Analysis Report

Hubbell Inc (HUBB): Free Stock Analysis Report

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