Home/ Markets / Stock Markets/  20 high potential stocks to start your momentum journey

Have you ever wondered what sequential returns in the stock market look like? In other words, if the stock market has gone up in the previous month, will it go up in the current month as well? Or will it go down?

Likewise, if the market has gone down in the last one month, will the downward trend continue, or will there be a reversal?

You see, back in 1933, two gentlemen, Alfred Cowles III and Herbert Jones, undertook a massive study to find out.

They wanted to find out the ratio of sequences i.e. number of times positive returns were followed by positive returns or negative returns were followed by negative returns to reversals i.e. positive returns were followed by negative returns, and vice versa.

Cowles and Jones went the extra mile and analysed data going back a huge 100 years. And when the results came out, they were indeed beyond what anyone could have expected.

The data revealed that there was a 63% chance that if the market had gone up in a given month, it would go up in the succeeding month, or, if it had gone down, that it would continue to go down for another month.

In other words, if you were looking to make profits based on a stock price or a market movement, you are better off buying after the market has gone up the previous month and selling after it has gone down.

Betting on continuation of a trend would have yielded better results than betting on short term reversals.

Deeper analysis brought to light the fact that this was a significant discovery and not some random outcome. Unfortunately, not many investors and fund managers chose to capitalise on this finding.

They were too busy listening to Ben Graham and his value investing musings or were constructing portfolios using the modern portfolio theory and the efficient market hypothesis.

In fact, it was not until the early 1990s that the meticulous findings of Cowles and Jones received a massive push. This time however, there was no looking back.

The return of this strategy could be traced to the year 1993 when another pair of gentlemen, Jegadeesh and Titman, published their seminal work on what came to be known as momentum investing.

Here's their finding in a nutshell.

  • Strategies which buy stocks that have performed well in the past and sell stocks that have performed poorly in the past generate significant positive returns over 3-12 month holding periods.

If you want to earn market beating returns, then a portfolio of stocks comprising winners of the past 3-12 months is an option worth considering.

Jegadeesh and Titman study on momentum opened the floodgates for both research as well investment based on this phenomenon.

Soon, there were detailed papers that studied momentum across asset classes, geographies, and time periods. And in almost all of them, the momentum effect was alive and kicking.

Buying past winners pays off and the inefficiency is big enough to generate market beating returns over the long term.

You see, I have already spoken about why momentum investing works in my previous pieces on the subject. Therefore, I'm not going to repeat myself here. All I can say is that I have been studying momentum for quite some time now and I am impressed with both, its simplicity as well as its efficacy.

Please don't get me wrong, I am still a dyed-in-the-wool value investor who firmly believes in the principles of intrinsic value and margin of safety.

However, momentum investing has left me impressed enough to confess that if you want to allocate a small 5-10% of your corpus to a speculative style of investment, momentum investing should be your first choice.

In fact, I have been back-testing several momentum strategies for the past few months and I believe that I finally have the one which does a good job of minimising your risks without hurting returns too much.

Between 2013 and 2021 i.e. an 8-year period, the strategy has delivered returns of more than 8x versus the 3x returns earned by the Sensex and 4.5x returns earned by the BSE Small cap index.

Some notable winners include:

  • Tata Elxsi - Up 357% in 15 months
  • Navin Fluorine - Up 274% in 18 months
  • Persistent Systems - Up 266% in 15 months
  • Saregama Ltd - Up 229% in 9 months
  • Atul Auto - Up 216% in 21 months

...and many more.

The strategy behind identifying these winners isn't all that difficult once you decide to practice momentum investing.

All you have to do is find stocks exhibiting strong momentum, scan them for a few important fundamental parameters, and then hold them till the time their momentum is intact.

That's it. Simple rules that unleashes the power of momentum and puts you in a great position to earn market beating returns.

Now these winners are all good and fine. But what about the future? What momentum stocks should I invest in so that even they go on to become multibaggers?

Well, I have good news to share in this regard. I have identified a group of 20 stocks that have managed to clear both my momentum as well as fundamental filters.

These are the 20 stocks that you can start your momentum journey with if you haven't already.

Now, while I cannot reveal the names of these stocks as they are meant for an exclusive list of people, I can certainly describe them in brief.

My initial list of 20 momentum stocks is dominated by defence sector as well as stocks from the capital goods space.

There are five stocks from the capital goods space and four from the defence space. These two sectors put together will comprise nearly half of the corpus if the idea is to invest 5% in each stock.

Please note that we are not exercising our own judgement here. We are simply following Mr Market who seems to have taken a liking towards these two sectors.

Apart from defence and capital goods, there's a pharma stock, a stock each from the sugar and the paper space and some other sectors.

Then there's even a largecap, one of the biggest gainers in recent months that's expected to continue its dream run in 2023 as well.

So, these are the first batch of momentum stocks which have cleared both our momentum as well as fundamental filters and which have a good chance of continuing their strong run of the last 12 months.

If you too want to join the exclusive group of people to whom these momentum stocks will be revealed, you need to attend this special online event that's absolutely free of cost.

In the event, I will discuss the momentum strategy in detail and how I will apply it to the Indian stock markets.

And yes, I will also show you how you can avail a special offer to gain access to my first batch of 20 of the most promising momentum stocks.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

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Updated: 21 Mar 2023, 10:23 AM IST
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