Stocks: Six Savvy Momentum Plays

S&P's latest screen looks for equities that have seen strong buying activity and carry top marks in key categories

by Michael Kaye, CFA From Standard & Poor's Equity Research

What have you done for me lately? The eternal question, when applied to stock performance, takes on a particular meaning for so-called momentum investors, those who like to select equities that already have the wind at their backs.

The basic premise of momentum investing is that what goes up can continue to go up, using the notion that strong investor demand for a stock can continue to feed itself for a certain period.

To find stocks with strong momentum, we searched our database for those U.S. equities that have shown price appreciation in the top 20% of the stock universe in the past 4-week, 13-week, and 52-week periods. But as our readers know, we always like to dig a little deeper: We wanted to ensure that the stocks on our list were attractive in other ways.

Turning to Proprietary Measures

We next looked for stocks ranked 4-STARS (buy) or 5-STARS (strong buy) based on fundamental research conducted by Standard & Poor's own analysts. Stocks with those designations are expected to outperform the S&P 500 index on a total return basis over the coming 12 months, with the shares rising in price on an absolute basis.

Then we turned to one of our proprietary measures, S&P's Fair Value model, a quantitative stock ranking system. The model calculates a stock's weekly Fair Value—the price at which it should trade at current market levels—based on fundamental data such as corporate earnings and growth potential, return on equity, current yield relative to the S&P 500, and price-to-book value. Stocks are ranked from 5, indicating significant undervaluation compared to the Fair Value universe, to 1, indicating significant overvaluation. We looked for those issues ranked 4 or above.

We next looked for issues with the highest score of "bullish" under S&P's proprietary technical investing measure.

Finally, to avoid speculative issues, each stock had to be priced above $5 per share and have a market capitalization of at least $500 million.

When we finished the screen, six names emerged:

Kaye, an analyst for Standard & Poor's Portfolio Services, is the author of The Standard & Poor's Guide to Selecting Stocks.