Six Common Factors to Identify Momentum Stocks

Momentum stock trading has been around for a while and has proven to be a reliable way for generating enormous money in the stock market. During the 1990s, for example, Clear Channel Communications increased by 5,615%, Emulex increased by 6,412%, Dell Computer increased by 10,198%, Activision increased by 13,819%, and Semtech increased by 15,231%. More recently Apple, Tesla, and Amazon are good examples of momentum stocks.

It is not uncommon to encounter stocks that surge in price and then offer a return of 100% to 300% in less than a year or even just a few months. Finding such equities, however, may be a complicated and stressful experience for new investors.

While various momentum stock traders use different criteria to find tomorrow’s big winners, there are usually six key stages to follow when screening for a big winner.

They are as follows:

1) Rising earnings or EPS (earnings per share)

Potential stocks for momentum trading should have excellent fundamentals on their balance sheets and be growing at a rapid pace. Selecting firms with high EPS ratings and rising growth rates over prior quarters ensures that you have a company that is growing at an above-average rate. Wall Street favors rapidly expanding earnings, and a company that achieves so will be rewarded with institutional sponsorship from large funds, causing share value to rise.

2) Annual earnings have increased by 25% or more in the last three years

Momentum stocks have also shown to be significant market players, with good annual results demonstrating their worth. Less than a 25% yearly increase in earnings will not pique the interest of large mutual funds or investors, resulting in a stock whose price will likely remain static or expand in value at a pace too slow for momentum investing.

3) A minimum volume of 100,000, or a growing volume

Stocks under consideration should have a daily average volume of 100,000 shares or have their average daily volume increase when the stock’s value rises. Any volume less than this indicates that the investment community is uninterested in the company, and you may have liquidity issues if you need to sell and exit.

4) A return on equity (ROE) of 17% or above

A promising stock should have a return on equity (ROI) of 17% or above. ROE (Return on Equity) is calculated by dividing net income by the number of shares held by investors. It is a measure of a company’s financial performance that shows the relationship between a company’s profit and the investor’s return. The higher this ratio is, the better for investors. This, in my opinion, is one of the most crucial characteristics of any stock investment.

5) Plays a leadership role in the market

Momentum stocks are also market leaders. When the major indexes fall, true stock leaders show strength by holding or even exceeding their highs or close to them. When the major indexes rally, these leaders often lead the rally, setting new highs and outperforming the market.

6) The price has reached an all-time high

Momentum stocks should be traded at their all-time highs as well. Trading at these levels at important technical entry points boosts your chances of riding the trend as the stock’s share price rises. This type of characteristic increases your chances of profitability because an uptrend is six times more likely to continue, thus the odds are on your side.

You may get free scans like these from MSN or Yahoo Finance in the section “Financials”, or from our daily stock reports. Begin by compiling a list of probable candidates and start tracking their performance. It may take some experience, but with time you will be able to identify the stocks that go on to make 100% or greater moves.

Remember, as with any sort of investing, to cut your losers immediately and ride your winners with a strong money management plan.

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