Momentum investing -- the notion that stocks that have displayed strength in the recent past tend to continue on an upward path -- certainly has its fans, and we like to use it as a screen theme from time to time. But one of the main concerns about investing in stocks that have been on the rise for a significant period is this: When will their valuations get too rich?
We tried to address that concern in this week's screen by identifying issues with solid momentum that also appear to be reasonably valued. Our first task was to identify those stocks in our database with the strongest momentum, by sifting for those with an S&P relative strength rating of 80 or more (meaning over the past 13 weeks they have outperformed 80% of the entire stock universe). The stocks also had to have a bullish ranking by a proprietary S&P technical model.
Next, we wanted to find the attractively valued names in that group based on these measures:
• Price-to-earnings (on next year's estimate) is less than or equal to the current market median of 15.8 times.
• EPS growth rate (next year's projected EPS vs. this year's projected EPS) greater than or equal to 16.7% (market median).
• EPS Growth (this year's projected EPS vs. last year's reported EPS) greater than or equal to 15.3 (market median).
• Projected five-year EPS growth rate greater than or equal to 14.1% (market median).
To enhance the attractiveness of the stocks on our list, we next looked for those ranked 4 STARS (buy) or 5 STARS (strong buy) by S&P Equity Research analysts. Each had to have a market cap above $1 billion.
When we finished our screen, these names turned up: