Tags: Momentum | Investing | Stocks | Shares

S&P Strategist: Don't Fear Momentum Investing

By    |   Thursday, 19 December 2013 07:37 AM

The common advice is to invest in undervalued companies and avoid those that have just seen their stock prices explode.

Buy low and sell high. Don't try to ride momentum because you'll jump on the wave too late — just before it crashes.

This year has taught us otherwise, notes CNNMoney.

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Stocks rose, and then rose some more, continue to reach new heights.

History proves that buying the previous year's winners will garner better returns than buying last year's dogs in hopes that they'll rebound, S&P Capital Chief Equity Strategist Sam Stovall told CNNMoney.

"Buy low and sell high may be the first rule of investing, but that doesn't mean you should invest only in poorly performing shares while ignoring stocks on a roll," writes CNNMoney editor Paul R. La Monica.

So should you rush out and buy Tesla with its 98 price-to-earnings ratio or Netflix with its 93 P/E ratio. Well, no.

First, screen for stocks within 10 percent of their 52-week highs, then seek companies with robust profit growth, low debt, and sound valuations, advises Eric Jackson of the hedge fund Ironfire Capital.

Using those guidelines, CNNMoney named FedEx, GameStop, Qualcomm, and Union Pacific as good stock picks.

The strategy also uncovered less-well known companies. For instance, the manufacturer Corning, through its Gorilla Glass unit, makes screens for most major smartphones and tablets.

"The company's balance sheet is a fortress," Irwin Michael, portfolio manager with ABC Funds, told CNNMoney.

Priceline.com also looks good, with strong revenue growth and plans to expand in Europe and Asia, and it does not appear overvalued despite a P/E of 21.

Another good bet is Blackstone, the third largest private equity player that has a P/E of nine, about half that of other asset managers.

"Their asset growth has been strong since their IPO, and it will continue to grow," RiverPark Large Growth Fund Mitch Rubin told CNNMoney.

Momentum investing can indeed be profitable, although the strategy poses risks and isn't for everyone, experts told BankRate.

In the cross-sectional momentum strategy, investors compare returns of stocks over a recent time period, such as the last 12 months.

"'Recently' can mean anything from a month or two or a quarter, but no longer than a year," Jacob Sagi, associate professor of finance at the University of North Carolina at Chapel Hill, told BankRate. "Also, 'recently,' when dealing with momentum strategies, is definitely not days.

Editor’s Note: Obama Donor Banned This Message (Shocking)

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The common advice is to invest in undervalued companies and avoid those that have just seen their stock prices explode.
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