Investing Tools for
Investors Looking to Excel
10/21/02
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Investing Tools for
Investors Looking to Excel |
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New Money Momentum Ideas Momentum investing argues that companies with strong stock price momentum and relative price strength vis a vis the broad averages, together with the strongest earnings momentum/ acceleration, and the least variation from hewing to trend line growth will provide the greatest rate of prospective returns in the equity markets. Clearly, the 90's have been the heyday of the momentum approach. Recently, revenue or cash flow momentum, even absent profits, is sufficient, given the number of new companies in nascent but highly promising fields which require significant upfront expenditures for capital equipment, technology development and/or marketing. These stocks are volatile, ripe to disappoint if they do not meet high expectations, and possessing valuations that have little historical precedent. However, they possess amazing growth dynamics as we build the broadband wired and wireless world, and develop amazing new cures for health problems. New Money Momentum ideas now include Small Caps and Cutting Edge ideas. We have done this to better telescope where the action is and where the stocks possess good business dynamics and technical considerations including being under accumulation. Additionally, we found the names from each area were producing significant redundancy. While there is a tendency for this approach to produce a disproportionate share of high tech and biotec names, if those groups were to lose their stock price momentum, they would fall off this list, and be replaced by names better meeting the criteria. In other words, momentum is not necessarily a proxy for high tech and new economy. The criteria, in essence, tell you when to enter, and, equally significantly, when to exit. This approach does not worry about valuations, or even whether a stock is technically overbought. It does not obsess on balance sheet issues, debt service, or other fundamental elements. If a momentum stock loses either its price momentum or earnings trajectory, it is sold without question. While momentum investors will approach sell discipline differently, generally, if a stock breaks either a 10, 20, or 50 day moving average, it is history. A missed earnings estimate will cause a stock to be summarily booted from the portfolio. Further, a company which makes an estimate, but talks down either the next quarter's estimate or its growth rate, will be sold. An earnings release accompanied by commentary suggesting any sort of problem will cause very quick and indiscriminate selling. Since these stocks are very high expectation stocks, any sort of downgrade of those expectations will cause massive price hemorrhaging. It is appropriate to be highly diversified. It is preferable that one name should not represent more than 10% of a portfolio (5% is preferable). Here are some of the criteria we applied to uncovering momentum plays. Please note we used relative values not absolute values.
To see previous new money Momenetum Portfolios, go here.
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