Hitching a Ride with Big Mo
By Michael Kaye, CFA
Is it a good idea to jump aboard a moving train? Momentum investors think so. They buy stocks that have been strong recently in the belief that the factors pushing a stock upward will continue to propel it. Though the notion that stocks on a roll will continue to move higher is dismissed in some quarters, many investors follow this approach. And we've decided to use it as the starting point for this week's screen.
First, the momentum part. We looked for those companies whose price performance earned them an S&P 13-week relative-strength ranking of 80 or greater, placing them in the top quintile of all stocks in the S&P universe. They also had to have a ranking of 3, or bullish, under another proprietary metric that indicates whether technical analysis signals a bearish, neutral, or bullish outlook on the stock.
Momentum and technical investing are backward looking. To gain a perspective on the stocks' future prospects, we set up another filter: Companies with favorable insider buying. Many investors avidly track the buying and selling of company stock by insiders -- officers, directors, and key employees -- based on the notion that upper management is in a prime position to judge a company's future prospects.
Using information gathered from Securities & Exchange Commission documents, market-data provider CompuStat tracks the buying and selling of shares by the top 10 individuals -- based on the number of shares traded -- having an insider relationship with a company. Taking CompuStat's data, we screened for companies where the transaction values of insider purchases over the last six months exceeded those of insider sales in the same period by a ratio of at least 10 to 1 (transaction values are derived from the number of shares bought or sold multiplied by the prevailing purchase or sale price at the time). A ratio that high may be an indication of strong positive sentiment on the part of company insiders.
Finally, we used one other forward-looking gauge. We sifted for stocks with S&P investment rankings of 4 STARS (accumulate) or 5 STARS (buy), meaning that S&P Equity Research analysts expect them to outperform the overall market over the next 6 to 12 months.
When we finished running the numbers, these seven names turned up:
|Company||Ticker||S&P STARS Rank|
|Burlington Northern Santa Fe||BNI||5|
|Pacific Sunwear of California||PSUN||5|
Kaye is an analyst for Standard & Poor's Portfolio Advisors
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