What are we looking for?
Mark Hulbert, editor of Hulbert Financial Digest, which tracks the performance of investment advisory newsletters, said, “the majority of newsletters at the top of the rankings for long-term performance are those that, in one way or another, employ momentum strategies.”
My colleague Rob Belanger and I take a look at a few stocks that are exhibiting some momentum characteristics, and we also added a couple of value metrics to our screen.
We started with U.S. companies greater than $1-billion in market capitalization and ranked them from the largest to the smallest.
For value, we looked at price to cash flow (P/CF). A low ratio may indicate an undervalued company while a higher ratio may point to an overvalued company. We also screened for value using EV/EBITDA (enterprise value divided by earnings before interest, taxes, depreciation and amortization) – one of the most commonly used valuation metrics. We are looking for a low number.
For momentum, the 50-day moving average had to be greater than the 200-day moving average. Moving averages are common technical indicators that help smooth out price action by filtering out the “noise” from random price fluctuations.
Volume is an important indicator in technical analysis as it is used to measure the worth of a market move. If a stock has made a major price move, either up or down, the perceived strength of that move depends on the volume for that period. The higher the volume during that price move the more significant the move. The volume of the last five days had to be 20 per cent greater than the volume of the previous 20 days.
Our final momentum metric, which we did not show, was that the share price had to increase every day for the past five days.
What did we find?
H&R Block has the greatest percentage difference between its five-day and 20-day volumes.
While all of the companies score very well in the momentum category, solar panel maker and installer Sunpower Corp. is the most overvalued company based on the P/CF and semiconductor assembler Amkor Technology looks undervalued, based on both the P/CF and the EV/EBITDA.
Please consult an investment professional or conduct further research before buying any of the companies listed here.