How to Spot Momentum Stocks

By: Mark Crisp

Momentum stocks are stocks with high returns over the past three to 12 months. Momentum investors seek out stocks with the potential to double or triple within just a few months. Momentum investors generally hold a stock for a few months and monitor their holdings daily. They tend to sell their stocks with a few months after acquiring it.

There are many stocks in the market that accelerate in price that go on to make 100% to 300% returns in less than year or even in a few months.

However, for the investors who are just starting, momentum investing can be a confusing and frustrating experience to find these stocks. Here are some keys to spot momentum stocks.

One of the things to spot momentum stocks is the relative strength of the stock compared to the overall market over a specific timeframe. Most momentum investors seek at a stock which has outperformed at least 90% of all stocks over the past 12 months. When major indices declines, a great momentum stock exhibit strength by holding or even exceeding their highs. When the major indices rally, momentum stocks typically lead the rally and make new highs outpacing the market.

Potential momentum stocks should show in their balance sheet that they are growing at an accelerated rate.

Another factor is the Earnings per Share growth. At least a 15% year-over-year earnings per share growth is needed to qualify a momentum stock. Stocks with accelerating rates of EPS growth over previous quarters are also considered.

In addition, a positive forecast by at least some analysts regarding the Company's earnings in necessary for identifying momentum stocks. Further, momentum investors also looks at whether the reported earnings exceeded the analysts forecasts compared to the last quarter.

A company can't grow its earnings faster than its Return on Equity, which is the Company's net income divided by the number of shares held by investors, without raising cash by borrowing or selling more shares. Many companies raise cash by issuing stock or borrowing, but both alternatives reduce earnings-per-share growth. For momentum investors, a potential stock should show an ROE of 17% or better.

The share price and trading volume of the stock are also factors to spot a momentum stock.

The only reason for stocks that trade at very low prices is that they are already out of favor with the market. Avoid stocks trading below US$5.
Momentum investors seek stocks that have high trading volumes, the number of shares traded daily on the average. Very low trading volumes indicate the markets lack of interest. Generally, momentum investors seek those with a minimum volume of 100,000 shares or at least see their average daily volume increases as the value of the stock rises.

Start keeping a list of potential momentum stocks and track their performance in the market. In time, you will be able to spot the stocks that go on to make 100% to 300% returns in less than year or even in a few months.

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