A momentum strategy is a favorite approach for many investors out there.
Who doesn't like the idea of buying a surging stock or ETF and riding it to even bigger gains?
However, in uncertain market environments, like we find ourselves in today, you need to consider safety too. Equities have been extremely volatile as of late and many times momentum can be going against you.
That is why investors who like the momentum style of investing may want to look to securities that are seeing positive price activity, but can provide investors with a margin of safety too. This approach may be the way to go for momentum investors in this uncertain time, and especially if markets remain shaky and prone to volatile negative moves in the weeks ahead.
How to Invest
Investors have a few ways to play this trend at their disposal. One way is by looking at securities that are in safer sectors like utilities or consumer staples. This approach will find safer stocks in general, and securities that aren't as prone to big negative moves when the market is sliding lower.
Another technique is to look at stocks that have great momentum scores, but are still trading at great values too. This can help investors to find the best-positioned stocks to surge that still have compelling valuations, which can give investors a nice margin of safety if broad markets turn south again.
No matter which approach suits you, we have a few picks below, which fit the bill. There are two ETFs and two stocks, which either have strong momentum prospects, or utilize momentum-based strategies when selecting securities for inclusion in their benchmark. Take a look at this list for a few investments that should appease even the most discerning momentum investor out there for today's market:
Bob Evans Farms (NASDAQ:BOBE)
BOBE owns and operates a series of full-service restaurants around the United States including over 500 in 19 states, mostly in the Midwest. As a stock in the restaurant industry, the company is well positioned to take advantage of broad macro trends such as a better jobs market and lower gas prices. However, unlike others in the space, it is a low beta stock with a beta below 0.65.
Earnings estimates have been rising as of late for this company, and it has a nice history in earnings season. The company has actually beaten in each of the last four quarters, including a 27% average beat in the past four reports.
In terms of momentum, the security is easily trouncing its industry counterparts thanks to a 12-week price change of 17.66%. The stock has also seen some nice momentum on the earnings estimate revision front including a 4.2% increase over the past quarter in the full year EPS estimate and it has earned a momentum grade of 'A' too.
However, not just momentum investors will like this security, as it has Value and Growth grades of 'A' as well. The stock actually has a VGM score of 'A' along with a Zacks Rank #2 (Buy) making it a compelling choice for investors in this market environment.
PowerShares DWA Consumer Staples Momentum ETF (NASDAQ:PSL)
In times of market uncertainty, staples can be a safe haven. So momentum investors who want to focus in on this sector can definitely consider PSL for their portfolios.
PSL follows the Dorsey Wright Consumer Staples Technical Leaders Index, which looks to find about 30 stocks in the consumer staples universe with strong relative strength characteristics. The fund is a little on the pricey side with a 60 basis-point fee, but it does a great job of giving momentum investors access to this safe segment of the market.
Current exposure is tilted towards the food product, beverages, and household products segment, while tobacco rounds out the industries that receive at least 10% of the total assets. Large caps do account for roughly 40% of the total assets, while mid cap securities receive a similar weight, leaving the rest for small cap securities.
The beta on this segment is pretty low, coming in at just about 0.75. The fund has shown a nice alpha as of late, and this ETF can definitely be considered a relative safe haven for momentum investors in this rocky market.
Shoe Carnival (NASDAQ:SCVL)
Retail remains an intriguing area of the market, though investors can't just buy any consumer-focused stock out there. The shoe-retail market is a top area to watch right now thanks to a high industry rank that is in the top third overall and solid trends for U.S. consumer discretionary purchases.
Shoe Carnival is well positioned to take advantage of these trends thanks to its wide network of over 400 stores across the nation, as well as its website. The company is expected to see double-digit EPS growth for this year, while it is expected to keep this trend up for the next year too.
Earnings estimates have actually been rising as of late for this stock, and we haven't seen any fresh estimates go lower for either the current quarter or the full year time frame. SCVL does have a pretty good track record at earnings season too, including a four-quarter average beat of 20%.
Momentum investors will definitely like this stock thanks to its 14% gain over the past three months, which easily crushes the industry. The stock has also seen a full-year estimate increase of about 0.9%, which isn't spectacular, but is great compared to an industry trend that is moving in the other direction.
It is also worth pointing out that this stock also receives a Value and Growth Score of 'A', in addition to a VGM score of 'A' too. SCVL actually has a P/S and P/B ratio less than the industry at large, while it still has projected sales growth and cash flow growth better than the industry average.
No wonder this is a Zacks Rank #2 (Buy) stock along with earning a momentum grade of 'A'. Clearly, investors searching for values in this top ranked corner of the market would be well served by giving SCVL a closer look for their portfolios.
First Trust Dorsey Wright Dynamic Focus 5 ETF (NASDAQ:FVC)
This brand-new ETF is based off of the ultra popular First Trust Dorsey Wright Focus 5 ETF (NASDAQ:FV) which is also from First Trust. FV uses the DWA momentum model and applies it to the First Trust sector ETF lineup. It takes the five best-positioned sector funds (by relative strength) and invests in those for the portfolio.
Well, FVC does the same thing, but with a twist on the methodology. The difference is that FVC includes investments in a cash equivalent, as represented by 1-3 month U.S. Treasury bills. The fund partially goes to this cash component when at least one third of funds in the universe have relative strength levels, which diminish compared to the cash index.
This is evaluated on a bi-monthly basis and it can go from 0-95% of the fund. However, on each evaluation, 33% is the most that can be increased or decreased from the cash component.
You can think of this as a safer or multi-asset version of FV. This will be great in markets that are trending lower or those that are even moving sideways. This makes the fund perfect for momentum investors who like the idea of buying sectors with the best relative strength characteristics, but with the option of moving into cash if the market isn't favorable.
Markets are rocky right now, but that doesn't mean that investors need to give up. There are still plenty of ways that momentum-centric investors can buy securities in this market, you just need to go a little bit below the surface.
Any of the picks highlighted above are definitely ones to consider for this situation, as they either focus on safe sectors, or look at securities that have the potential to surge, though they remain decent values for now. So if you are a momentum investor, there is no need to stick your head in the sand, just look to picks that can still satisfy your urge for momentum but will not be quite so volatile in today's choppy market.