Legend has it that the notorious gangster Willie Sutton was once asked why he robbed banks. His answer was seemingly obvious, yet remarkably poignant:
“Because that’s where the money is.”
So when investors ask me why I prefer momentum stocks, I can’t help thinking about this same quote. To me, it’s obvious and I strongly believe that everyone should follow suit. That’s because momentum stocks are the high fliers in every market environment. They offer the highest reward in the shortest amount of time.
The goal of this article is equally as simple. I want to show you the 4 steps in finding the best momentum stocks so you can enjoy the rewards in the months and years ahead.
“Because that’s where the money is” – Willie Sutton
Step 1: Screening
It begins with an initial screening process to help me find stocks to put on my radar. I look for Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy) stocks that:
• Have recently surprised earnings to the upside
• Have had earnings revisions to the upside in the last month
• Have outperformed the market
• Are within 15% of their 52 week highs
This helps me dwindle down the stock universe to about 40 high quality names with great earnings stories and fantastic price momentum. Then I can laser focus in on stocks with the highest likelihood of short term performance, deeply rooted in the proven Zacks Rank methodology.
Step 2: Trend
From the 40 or so potential investment ideas generated from the screen, I check to see which stocks are in an uptrend. There are many ways to do this and I could make this as complex as I’d like. However, in my experience the simplest approach is the best.
I use the 25 day simple moving average shifted to the right by 5 days and compare price to the average. If the stock is above the average then it’s in an uptrend. I’m not looking for turnaround stories or stocks that are value plays, I’m looking for momentum stocks. I only buy stocks in an uptrend.
