Momentum stocks have been hit hard lately, but long term data indicates you shouldn’t give up on them, according to Barron’s.
High-momentum stocks outperformed low-momentum stocks by 7.7 percentage points annually from 1927 through 2013, writes Barron’s Ben Levisohn, citing data from Dartmouth finance professor Kenneth French. And that outperformance tends to increase later in bull markets. High-momentum stocks have outperformed low-momentum stocks by 18.4 percentage points on average in the last 12 months of a bull market, Doug Ramsey of Leuthold Group says. “Mature bull markets are a good backdrop for momentum strategies, provided you rebalance the portfolios,” he says.
Wells Capital’s Jim Paulsen says economic momentum will help stocks. “We’re going to come to a wider acceptance that there is pretty good economic momentum here,” he said. “Good news will be good news for stocks.”
Brian Sanborn of Ned Davis Research tells Barron’s that investors should look for momentum stocks for which analysts have been revising earnings estimates upward, but not higher than the most recent reported quarter. “Companies with high expected earnings growth tend to disappoint,” he says. “You want to find stocks where analysts are revising upward, but not getting carried away.”