Six Keys to Finding Momentum Stocks for Successful Trading

Six Keys to Finding Momentum Stocks
Momentum stock trading is a powerful method for accumulating wealth in the stock market. During the 1990s, for example, companies like Clear Channel Communications, Emulex, Dell, Activision, and Semtech saw extraordinary growth, with returns ranging from 5,615% to over 15,000%.

Finding momentum stocks that deliver high returns can be challenging for beginners. However, there are six key characteristics that experienced traders look for when searching for the next big winner:

1. Accelerating Earnings or EPS: Look for companies with earnings per share (EPS) that are steadily growing.
2. Annual Earnings Growth of 25% or More: Ideally, the company should have shown an annual increase of at least 25% in the last three years.
3. Minimum Volume of 100,000 Shares: The stock should have a daily trading volume of at least 100,000 shares, or demonstrate increasing volume over time.
4. Return on Equity (ROE) of 17% or Better: ROE is a key metric that shows how effectively a company is using its investors’ capital.
5. Market Leadership: Momentum stocks often lead in their respective markets, even during broader market downturns.
6. Price at an All-Time High: Stocks trading at all-time highs indicate strength and potential for continued upward movement.

Momentum stocks should display strong fundamentals and accelerated growth. Companies with high EPS growth rates are more likely to attract institutional investors, which can further increase the share price. The annual earnings growth of 25% or more is crucial as it attracts mutual funds and other large investors, driving the stock’s momentum.

Volume is also an important factor. A daily average of 100,000 shares or more indicates strong interest from the investment community, which improves liquidity and makes it easier to buy and sell. Additionally, a high ROE shows that the company effectively utilizes its capital, which is essential for momentum investing.

True momentum stocks are market leaders that exhibit resilience during declines and outperform during rallies. They often hit all-time highs, and buying at these levels can increase your chances of profitability, as uptrends are more likely to continue.

You can use stock screeners on platforms like Yahoo Finance or MSN Finance to find potential candidates. Start by building a list of promising stocks and track their performance over time. With practice, you can learn to identify those that make substantial moves.

Remember, managing risk is essential—cut your losses quickly and let your winners run while following a sound money management plan.