Editor's Note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on
Outside of crooked CEOs, few players in the investing world are the subject of more derision than momentum traders, people who buy stocks that are rising rapidly with the expectation that they'll go higher.
It's the usual Wall Street hypocrisy at work. You see, everyone says they want to be like Warren Buffett and focus on long-term value. But deep down, when the after-work martinis are flowing, most reveal that they really want to be like Buzz Lightyear and find stocks that will go "to infinity and beyond!"
So at this time of year, when animal spirits are stirred by good cheer and rising indices, let's take a week's break from our usual search for cheap, neglected, low-risk stocks that might find favor one day and take a look at pocket rockets whose fuses are already lit and which might take us on a wild ride. At least for a couple of weeks.
Finding vehicles to share with the "mo-rons" is most certainly not rocket science. You just fire up a
screening engine like the one at MSN Money or StockCharts.com -- electronic filing cabinets filled with stocks sortable by 400-plus numerical criteria -- and search for companies that are up the most in the past year, quarter and month.
Weed out the penny stocks traded on iffy exchanges such as the OTC Bulletin Board, as well as ones that have market capitalizations under $100 million, prices under $3 or trade less than 50,000 shares a day, and you land smack in the momentum traders' playground, complete with monkey bars.
Investing in Inertia
The theory behind buying these sorts of stocks is pretty basic: Just reference the work of the great 17th-century speculator Sir Isaac Newton, whose first law of motion states, in part, that "an object in motion tends to stay in motion with the same speed and in the same direction "
unless acted upon by an unbalanced force." That's translated from Latin, so to make it a little more plain, it could read: "What goes up will keep going up until it doesn't."
In a bull market, you'd be surprised at how often this works, so long as you take profits quickly and move on to the next zoom-mobile.
One of the tricks, traders will tell you, is to combine naked greed with just the right amount of common sense. Too much rationality, and you will miss some great opportunities when oddball momentum stocks go nuts. Not enough, and you will be left with a mess when the mustard comes off the hot dog.
I'll provide 20 names for you today in four categories, ranked from most to least speculative, and will pick the potential future winners in each. Don't tell your mom or financial adviser about these ideas; they're like running with scissors. It's just between us.
To start, let's just go for the lowest-priced, fastest-moving stocks with the fewest shares available and the greatest recent increase in volume. Stocks with the absolute lowest prices and scantest number of shares tend to be the sprightliest.
An increase in volume tends to show that there's rising interest in the stock among traders.
1. Low Priced/Low Float
Leading choices among stocks with low prices and a small number of outstanding shares in the market are listed in the following table.
My top pick of the bunch is
( PSPT), which provides outsourced customer management to large U.S. and Latin American companies from facilities in the Philippines and Costa Rica.
Revenue growth has been outstanding, though earnings growth has been spotty due to the need to invest in growth. It gets the nod because of a strong return on invested capital of 26% and a reasonable valuation for a fast-paced small cap: The price/earnings multiple on 2007 estimated earnings is 25, or about even with its growth rate.
You already know that the
Dow Jones Industrial Average
has risen a ton this year, so for this screen my aim was to show you the top momentum candidates in the
. Of the bunch, my favorites are
Convergys, strangely enough, also provides outsourced customer care, human resources and billing services from 65 contact centers. Waters makes precision instruments for scientists, is relatively cheap considering its high-double-digit growth and that it earns a high 30% return on capital. Both have the potential to advance another 50% over the next two years.
3. High Ratings
The StockScouter rating system at MSN Money was designed to help take the guesswork out of choosing stocks. Companies rated at the top of the spectrum, at 9 and 10, are expected to do the best over the next six months with the least amount of volatility.
I screened for the top-performing companies in the market with the highest ratings, then narrowed the list down to those that the StockScouter system believes are in market capitalization and sector groupings that should additionally outperform over the next half year. I've provided you with some choices to explore below.
My top two picks are Israeli wireless services provider
, which I also recommended back at the start of October, because it is cheap and fast-growing and earns a great 16% return on capital;
, because it is also cheap and fast-growing and is a high-return consolidator in the quickly rationalizing global steel business; and for pure momentum, little-known
of Amsterdam and Houston, which provides oil-field analytics to major energy explorers and is remarkably cheap, at 19 times next year's estimated earnings, despite growth of about 20%.
4. Just Plain Cheap
Some momentum investors can't resist the temptation to demand absolute cheapness from their highflying stocks, so this final list is for them. The following choices all trade for price/earnings multiples that are lower than their industry, lower than the S&P 500 average, lower than their own P/E of a year ago and lower than their growth rate, as well as for price-sales multiples that are extra low at under 1.5.
My top picks here are
( VTIV), which provides outsourced testing and sales services to drug makers and earns a strong 13% return on capital;
Universal Stainless and Alloy Products
, a steelmaker that provides a lot of high-end products to the aerospace and energy exploration industries; and
, an underrated electric utility that illuminates the Connecticut area.
When you look at these as a group, you see a lot of industrials, outsourcers and materials makers that are helping other businesses drive down costs and improve quality. The shares are in high demand because investors don't think the global economy is headed for continued economic growth and prosperity. Are they right? We should know soon enough. To infinity and beyond! I'll track them for the next six months and report back.
At the time of publication, Markman was long inVentiv Health, although positions may change at any time.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider PeopleSupport and Universal Stainless and Alloy to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
Jon D. Markman is editor of the independent investment newsletter The Daily Advantage. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback;
to send him an email.