CHICAGO, Aug. 18, 2011 /PRNewswire/ -- Zacks Investment
Research presents their newest list of stocks featured in their
weekly Equity Market Anomalies, which describe how to profit from
stock market opportunities. The stocks in this article focus
on the profitable Momentum anomaly. Stocks include: CVR Energy,
Inc. (CVI), Select Comfort Corporation (SCSS),
W&T Offshore Inc. (WTI), Buckeye Technologies
Inc. (BKI) and Stone Energy Corp. (SGY).
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Learn more about equity anomalies at this site:
http://hema.zacks.com/
Here are highlights from our most recent Equity Market
Anomalies feature:
Profit from Hordes, Swarms, and Flocks
When I think of "hordes," I imagine mass armies of Barbarians
pouring in and looting Rome.
"Swarms" remind me of thousands of teeming bees rushing out
of a hive. And on numerous occasions, I've seen "flocks" of
crows aggressively attacking lone hawks. Does this aggressive
mob behavior exist in the stock market? And is there power in
a teeming sea of investors? You betcha!
As it pertains to the stock market, this effect is called
Momentum investing. Momentum investing is the approach of
buying stocks that have had price increases over a period of a few
months to a year. Essentially, it is a bandwagon effect.
As investors see a stock going up, they are quick to buy, and
more investors follow suit. It's like following a crowd and
there is comfort in numbers when it relates to stock investing.
Would you feel more comfortable buying a stock that's going
up or down? Exactly!
Furthermore, Momentum investing is considered a Market Anomaly
because the effect mystifies economists that believe the market is
efficient. Since they think the market fully reflects all
information and, therefore, profits above market returns do not
exist, it should thus follow that excess returns cannot be made
simply by purchasing stocks that have had high recent returns.
Luckily for you and me, the Momentum Anomaly is alive and
well.
Here's proof. Let's use the S&P 500 as the benchmark
for the market return and build a portfolio of the ten S&P 500
stocks that have had the best performance over the previous 52
weeks. From January 2000 until
July 15, 2011, the ten stocks that
had the best performance prior to portfolio formation had a
compounded annual return of 18.7% compared to the S&P 500's
0.8%. These results indicate that investing hordes, swarms
and flocks have a significant amount of power and following trends
can actually lead to outperforming the market.
You may be wondering, "Is there a drawback to jumping on the
bandwagon?" Well yes there is. Sometimes crowds panic
and stampede in the opposite direction. This reversing of
direction can lead to high amounts of volatility in a portfolio.
The annualized volatility of the S&P 500 has averaged
about 18% over the last 11 years while the portfolio of the ten
highest Momentum stocks of the S&P 500 had an average
annualized volatility of 34%. So our sample Momentum
portfolio had about twice the volatility of the market, but also
about 23 times the return. Just be aware hordes are going to
win over time even if they can be a bit fickle.
Here's a method for finding stocks to take advantage of the
Momentum Anomaly:
- First, create a liquid, investible set of the stocks with
the largest 3000 market values and average daily trading
volume greater than or equal to 100,000 shares (if there's not
enough liquidity, it'll be hard for you to trade it).
- Next, due to the uncertainty regarding some foreign issues,
keep only U.S. common stocks (There's some bad stuff out
there, so let's avoid it.)
- Add another filter by selecting those stocks with a Zacks
Rank