Invest in momentum stocks with great value
Stock selection results from a careful monitoring of price dynamic and fundamentals.
“What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower.” - William O’Neil -
Price momentum consists in buying best past performing stocks as they are likely to remain good performers. Conversely, contrarian style tries to buy a bottom with the hope that a fast and strong recovery will follow soon.
Price momentum stands among best performing strategies. Inertia of underlying businesses justifies why powerful upward trends are likely to continue a few quarters more.
On the other hand, a business that has been suffering for months or quarters is not likely to recover in a few days or weeks. Therefore, bottom fishing is a hazardous game.
Stocks monitored on this website benefit from a good price momentum because they have reached a recent 52 week high.
“Price is what you pay, value is what you get.” - Warren Buffett -
Several criteria are analyzed and must be validated for an inclusion in the conviction buy list.
Market cap: Proposed companies have a market capitalization in excess of 100 million (USD or EUR) to avoid liquidity problems.
Price/earnings ratio must be low compared to peers.
Market cap/cash-flow ratio must remain realistic to avoid bubble investing.
Operating margin must be high compared to peers and be one of the company's advantages.
PEG must be low compared to peers and reflect a strong growth.
Revenue must be growing on an annual time frame.
Debt must remain under control and not be excessive. Some businesses operate on a high level of debt, it should then be offset by solid properties and plant valuation. Too much debt is a wide open door to bankruptcy.
Goodwill/market cap ratio must not be too high to reduce risks of potential accounting manipulations.
Free float must be high, except for some family businesses whose members hold a huge stake in their own business. Better avoid companies controlled by financial institutions or seeding companies that can flood the market with new shares at any time.
- Stock price must have reached a recent 52-week high
- Stock price must be above its 20-day moving average
- 20-day moving average must be above the 20-week moving average
- 20-week moving average must have a positive slope
- Wait for a price pullback: a retest of the 20-day moving average
- Stock is bought above previous day's high, 1 to 3 days after that retest
- If dynamic is too weak to take previous day's high, stock is removed and replaced by another stock
“Cut your losses early, let your profits run.”
When price hits the 20-week moving average, a stop is set a little under that week’s low