Momentum strategies are very much underrated when investing in stocks. A recent study at Cambridge’s Judge Business School found that stocks that beat the S&P 500 in the preceding 12-months are likely to gain 17.5% on average in the following year. Investors need to know that this isn’t a guarantee you’ll earn positive returns if you simply invest in stocks that beat the S&P 500 over the past year, but the study does, however, provide support to using momentum metrics when analyzing which stocks to buy.
Primary fundamental factors that ignite momentum are cyclicality, secular growth and corporate events such as earnings releases. In addition to the fundamentals, a few tools can be used to track momentum, and for this article, we’ll be using the relative strength index (RSI) and moving averages (MACD) as indicators.
The relative strength index is an oscillator that tracks the magnitude of recent price changes. The RSI provides a number between 0-100. Anything above 70 is considered overbought, and anything below 30 is considered oversold. You need to consider the metric out of isolation and combine it with the mentioned fundamental factors to determine whether the momentum is justified.
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Finally, the moving averages are constantly updated mean prices over discreet periods (usually 10 -, 50-, 100- and 200-days). When a stock is trading above its moving averages, it’s usually a momentum signal.
I selected 7 momentum stocks to buy that I think will sustain their recent success:
- Microsoft (NASDAQ:MSFT)
- Big 5 Sporting Goods (NASDAQ:BGFV)
- Barclays (NYSE:BCS)
- CrowdStrike (NASDAQ:CRWD)
- Devon Energy (NYSE:DVN)
- Affirm (NASDAQ:AFRM)
- Global Ship Lease (NYSE:GSL)
Microsoft (MSFT)
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Microsoft surpassed its first-quarter earnings estimates this month as cloud sales ended up being better than anticipated. The tech giant beat revenue and EPS (Earnings-Per-Share) estimates by $1.3 billion and 64 cents, respectively. Management has upgraded its second-quarter estimates with total revenues now anticipated to reach $50.15 billion to $51.05 billion versus a consensus estimate of $48.92 billion.
Microsoft stock trades above its 10-, 50-, 100- and 200-day moving averages and has an RSI of 67.3, which is a significant increase from a month ago when the stock’s RSI nearly exceeded the 37 handle.
This month’s momentum has been based on investors buying the dip after tech stocks drew down in September. I, however, think that Microsoft will benefit from its recent earnings beat to form solid long-term momentum. Microsoft has a strong foothold in both the hardware and software space, ensuring that it consistently lives up to earnings expectations.
Big 5 Sporting Goods (BGFV)
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Many think that consumer goods stocks have run their course and that inflation coupled with potential diminishing consumer sentiment will hinder the sector. The naysayers need to look at disposable income charts; disposable income in the United States remains elevated at nearly $55,000 per capita versus pre-stimulus $50,000 per capita in March 2020.
In addition, the company’s managed to reduce its operating costs since 2017 due to the digitalization of its sales channels and its general supply chain. With cost-savings being consolidated, Big 5 Sporting Goods is in a position to reduce the prices of its goods to stimulate customer demand, while other smaller retailers may have to stick to current prices to pay for their rising input costs.
The stock’s trading above its 200- and 10-day moving averages with an RSI of 52.5. The RSI has experienced a shape downturn over the past month from the 44 level, and it still has plenty of time left before it reaches the overbought threshold.
Recent momentum was stimulated by a $34.37 million revenue beat in its August second-quarter report. I expect momentum to be sustained due to the mentioned fundamental reasons.
Barclays (BCS)
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Barclays is a banking stock, and if you’ve followed banking stocks for a while, you’ll know that they correlate with the 10-year U.S. Treasury yield, which is expected to rise in the medium term. A higher 10-year yield combined with rising interest rates allows the bank to earn a better margin on its originated loans and better returns on its debt investments.
Barclays earns roughly 54% of its revenue from interest-bearing activities, meaning it ticks all boxes required to rise along with the 10-year yield. Furthermore, according to an interim report, Barclays blasted through its 2021 Basel III stress test with a capital adequacy ratio of 18.9%, meaning the bank’s assets are of low risk and should provide sustainable earnings.
The stock is currently trading above its 10-, 50-, 100- and 200-day moving averages with an RSI of 63.
Barclays stock is undervalued with a forward price-to-earnings ratio of 6, which is 48% lower than its industry peers. If we consider value prospects combined with 10-year yield correlations, we can conclude that the momentum metrics are valid indicators.
CrowdStrike (CRWD)
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This stock just seems unbreakable! CrowdStrike stock has more than doubled the past year, with nearly 10% of it being in the past month due to another earnings beat. The cyber firm has a 100% success rate with earnings beats with a Beneish m-score of -2.13, which means it’s an unlikely earnings manipulator.
CrowdStrike has a strong foothold in a part of the cybersecurity market, which doesn’t have a history of frequent product switching, contributing significantly to its consistent earnings results.
In its first quarter earnings report, the company beat revenue estimates by $14.16 million and EPS estimates by 2 cents. Key drivers behind the results were 1,660 in net new subscribers (+81% year-over-year) and 78% gross margin in subscriber-based earnings.
The stock is trading above its 10-, 50-, 100- and 200-day moving averages with an RSI of 58. There’s every indication that momentum will continue with the firm’s sustained earnings beats and strong market position. Crowdstrike is in a hypergrowth phase, and unless a systemic shock happens, this won’t change.
Devon Energy (DVN)
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Devon Energy stock has gained more than 30% over the past month due to systemic and idiosyncratic reasons. Rising oil prices and a debt rating increase by Moody’s have bolstered investors’ expectations.
Devon Energy has progressed well since its WPX Energy merger in January, which has strengthened its foothold in the Delaware Basin. Moving forward, Devon Energy has committed to automated equipment, less aggressive greenfield investments and creating shareholder value.
The stock’s trading above its 10-, 50-, 100- and 200-day moving averages with an RSI of 66. Momentum ought to be sustained, as energy stocks haven’t quite caught up with the increase in oil and gas prices. Devon Energy’s earnings over the next year will most likely remain elevated if we consider price spikes and the long duration at which oil gets stored, meaning its inventory was produced cheaply, and it’s being sold at a higher price.
Finally, Devon Energy is still an undervalued stock with a forward price-to-earnings ratio of 32% below its 5-year average. I still see a lot of upside for the stock based on the mentioned fundamental factors.
Affirm (AFRM)
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Affirm started off like a house on fire after its initial public offering in January, but the stock has been quiet ever since. It seems as though the stock’s momentum has been reignited after a series of events in which the “buy-now-pay-later” company built critical partnerships with the likes of Target (NYSE:TGT) and American Airlines (NASDAQ:AAL). Additionally, the market has also gathered optimism from the fact that Affirm announced in September that it plans to accept cryptocurrency on its platform.
Furthermore, Affirm managed to beat expectations with its first-quarter earnings expectations in September. The fintech company beat revenue estimates by $37.39 million, upgraded its full-year guidance and anticipates a further 50% in topline revenue growth.
Affirm stock is trading above its 10-, 50-, 100- and 200-day moving averages with an RSI of 61. Since August, the stock’s RSI has sustained itself around the 60 handle, but I anticipate the metric to climb immensely as the crypto story evolves and full year-earnings approaches.
Global Ship Lease (GSL)
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The recent dry bulk craze and increased consumer spending ignited Global Ship Leases’ initial upward trajectory. I like Global Ship Lease as a company because of its agility; it’s in the facilitation business rather than being an asset-heavy shipping company, which could crumble under financing obligations if another Covid-19 variant had to hit supply chains.
Since the turn of the year, the stock has gained by more than 90% and beat revenue estimates twice. Furthermore, the company repurchased 521,650 shares during 2021, and insiders purchased a further 2.5 million. Insider buying often indicates that management thinks the share price will increase soon, and share repurchases also boost the stock’s intrinsic value.
The stock is trading above its 50-, 100- and 200-day moving averages with an RSI of 52, which has recently seen a shape reversal off the low 40s level.
From a valuation vantage point, the stock is in an undervalued territory with a forward P/E ratio of 7.4, which is 66% below its peer group average.
On the date of publication, Steve Booyens held long positions in MSFT, BCS, CRWD, DVN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, Benzinga, Gurufocus and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency and ESG.
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