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Market Swing Makes Hay for Momentum Stocks

25 March 2015 in Trading Ideas

Trading with a momentum strategy is usually not for the faint of heart, but short-term rallies by the broader market can help make conditions easier.

The Finding Momo motif, a portfolio of stocks that provides exposure to companies whose stock prices have risen the most over a six-month-period, on a risk-adjusted basis, has gained 15.4% in 2015. In that same time, the S&P 500 has risen 2.7%.

Over the past 12 months, the motif has increased 14.6%; the S&P 500 is up 15.6%.

As Lee Jackson wrote a few weeks ago for 24/7 Wall St., as the market continues higher, investors are starting to look for the stocks that are delivering results, or data that can drive share prices higher. After an almost six-year bull run, the market as a whole, Jackson wrote, is “expensive” at 16 times earnings.1

While not historically off the charts, Jackson wrote that continued upside will be constrained unless higher earnings are in store. The market’s tepid 1% rise in the past three months suggests many stocks and sectors may be exhausting their capacity to move significantly higher.

However, Jackson pointed to a recent research note by investment bank Cowen that raised price targets on several stocks with earnings and upside potential.

One of those, BioMarin Pharmaceuticals, already eclipsed Cowen’s boosted price target of $125, and though it’s fallen off its 2015 peak, is still up more than 36% this year. Cowen’s analysts believe that BioMarin has an extremely attractive pipeline with three potential catalysts this year alone.

Also, past concerns about BioMarin management’s ability to control costs and allow the company to become sustainably profitable are fading. The company reported strong fourth-quarter numbers with all major products ahead of consensus estimates, and guidance was right in line with expectations, according to the report.

BioMarin’s stock is up 67% in the past 12 months.

Another biotech company continuing to hold up is Cempra, which has a 5.1% weighting in the Finding Momo motif. A separate report by Cowen recently singled out the company as one of the “most loved” biotech stocks by portfolio managers.2 One can see why: it’s up more than 55% already this year and has gained 224% in the past 12 months.

The Cowen team said that the company, which develops antibiotics to treat infectious diseases, is a “very positive story,” as many of the other players have left the antibiotic market.

Solithromycin is the company’s potent fourth-generation Macrolide antibiotic, and oral data in Phase III this past January was “very positive.” Its polymorph patent extends to 2032, which is “significant,” and with other drugs also well along in clinical studies, the company may be a buyout target for a bigger biotech, Cowen said.

Of course, dabbling in smaller volatile stocks also means gains can be trimmed in a matter of days, if not hours. Shares of Cempra have lost nearly 10% since March 18, the type of give-back that may not be palatable to every investor.

On the other hand, if you continue to see a climbing stock market giving lift to stocks with a recent history of rising, and you have the risk tolerance to follow that trend, the Finding Momo motif may be worth further research.

1Lee Jackson, “Analyst’s 5 Top Momentum Stocks for 2015 With Huge Upside Potential,” 24/7 Wall St., Jan. 7, 2015, http://247wallst.com/investing/2015/01/07/analysts-5-top-momentum-stocks-for-2015-with-huge-upside-potential/, (accessed March 23, 2015).

2Lee Jackson, “The 5 Most Loved Stocks of Biotech Managers,” 24/7 Wall St, March 4, 2015, http://247wallst.com/healthcare-business/2015/03/04/the-5-most-loved-biotech-stocks-of-portfolio-managers/, (accessed March 23, 2015).