Momentum investing is quite different from many of the strategies typically employed by long-term investors. In momentum trading, the goal isn't to buy a stock at an attractive valuation but to buy stocks that have already considerably gone up to take advantage of the "momentum" in their business -- and in their stock price.
Source: Getty Images
Investors should be aware that there is no single definition of momentum investing. This is especially true when it comes to time periods. For example, short-term traders often define a stock's momentum as its price change over the past 10 days. Momentum traders tend to pay attention to data such as trading volume and like to use technical indicators like moving averages to assess where a stock might go in the short term and to guide their strategy.
Generally, they look for stocks that are trading above their moving averages as a sign that they will continue moving higher. Alternatively, short sellers look to capitalize on a stock that’s on a downward trend. Momentum investing can also be a popular strategy among professional investors such as hedge funds.
5 great momentum stocks to put on your radar
Now that the is in a bear market, it’s a tricky time to be a momentum investor. Still, that doesn’t mean that there aren’t opportunities for investors looking to take momentum profits. Keep reading to see five momentum stocks that have already delivered strong results for investors and could continue to outperform.
1. Peabody Energy
Investing in a coal company might seem like a strange move in this day and age, but coal has actually experienced a strong rebound in recent months as oil prices have spiked and Europe has tried to wean itself from Russian oil in response to the invasion of Ukraine.
Coal prices are even hitting records in places such as Asia due to tight fuel supplies.
Meanwhile, shuttered European coal plants are restarting as the continent looks for new energy sources. That’s all good news for Peabody Energy (BTU 1.3%), the biggest U.S. coal producer, which has benefited from soaring coal prices.
Through June 28, 2022, the company’s stock is up 136% for the year, and adjusted EBITDA jumped more than 400% during its first quarter to $327.5 million.
2. Grocery Outlet
It’s been a tough few months for most retailers as consumers are shifting their spending away from goods and over to services such as travel and restaurants. At the same time, many retailers have been caught flat-footed by the shift in spending habits with bloated inventory levels on their balance sheets.
However, that’s good news for retailers such as Grocery Outlet (NYSE:GO), which specializes in closeouts, meaning it gets cheap merchandise from other retailers or wholesalers that need to unload some of their inventory.
As a result, the company offers rock-bottom prices, which is great during an inflationary environment when consumers are looking to save money. The stock is up 50% year to date and should keep on benefiting from the elevated inventory levels that its peers are experiencing.
3. Cal-Maine Foods
It might be hard to find more of a momentum stock than Cal-Maine Foods (CALM 0.52%), the nation’s biggest egg producer.
Cal-Maine’s fortunes tend to swing with egg prices, and when prices go up, profits usually soar. The company is also unique in that its dividend is directly tied to its quarterly profits, so it pays out one-third of its profits each quarter.
Egg prices have been soaring due to avian flu and a broader increase in food prices at the supermarket. Average selling prices for Cal-Maine increased 29% for the quarter that ended in February.
Shares of the egg producer are up 33% year to date and should continue to gain if egg prices remain elevated.
4. Funko
Funko (FNKO 6.52%), the toymaker best known for its P.O.P. collectible figurines, has also been on the move lately. The stock was up 35% over a three-month period in mid-2022, thanks to a strong earnings report, its acquisition of Mondo, and an endorsem*nt from JPMorgan Chase (JPM 0.19%), which said Funko operated in a recession-resistant category.
Sales jumped 63% in the first quarter, showing that Funko is bucking the broader trend in retail, and the company raised its guidance.
If Funko can continue to put up strong results, the stock’s momentum should continue.
5. Marathon Oil
It's not difficult to figure out why Marathon Oil (MRO 0.32%) has gained more than 70% in the past year. After a terrible 2020 fueled by low demand and uncertainty, energy demand is back and prices have increased. The price of crude oil has soared, and it’s likely to remain elevated as long as the Russia-Ukraine war persists. With one of the lowest cost structures in the oil industry, Marathon Oil is in an especially strong position to capitalize if prices continue to rise.
Related investing topics
Momentum stocks can be a good investment
Past performance is not a guarantee of future returns, but it is often a good indicator. Although bear markets can be difficult times to invest, the stocks above have all proven their mettle in a difficult economic environment. If you’re looking for stocks that can thrive despite the current market volatility, this list represents a good starting point.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Matthew Frankel, CFP® has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cal-Maine Foods and JPMorgan Chase. The Motley Fool has a disclosure policy.
