3 Momentum Anomaly Stocks as Markets React to New Tariffs

Navigating Market Volatility with Momentum Investing

The U.S. equity markets have experienced a consistent decline over the past few days, driven by President Trump's renewed focus on tariffs. A series of proposed tariffs on imported goods from 14 countries, including key allies like Japan and South Korea, has sparked significant market uncertainty. These tariffs are set to take effect in August, with more nations expected to be added in the coming weeks. While negotiations remain open, the abrupt shift in trade policy has created financial turbulence and forced policymakers to act quickly to shield their economies.

In times of market volatility, investors often turn to proven strategies that can generate consistent returns. One such approach is momentum investing, which focuses on stocks that are showing strong upward or downward trends. This strategy capitalizes on the idea that once a stock begins to move in a particular direction, it is likely to continue doing so for some time. This method is particularly effective when traditional value or growth investing fails to deliver desired results.

Understanding Momentum Investing

Momentum investing follows the principle of "the trend is your friend." It involves buying stocks that have shown strong performance and selling them when the trend begins to reverse. This strategy is based on the psychological tendency of investors to extrapolate current trends into the future. The key to success lies in capturing the period before prices return to their mean or rational levels.

Historically, momentum strategies have been known to generate alpha over long periods and across different market conditions. However, implementing this strategy requires careful analysis and timing. Detecting these trends is not straightforward, but there are ways to simplify the process.

A Strategic Approach to Momentum Stocks

To help investors identify potential winners, a screening process can be used to select stocks that exhibit strong price momentum while also showing signs of a short-term pullback. Here are the parameters used in this approach:

• Percentage Change in Price (52 Weeks) = Top #50: This selects the top 50 stocks with the highest percentage price change over the last 52 weeks, ensuring we focus on those that have shown consistent growth.
• Percentage Change in Price (1 Week) = Bottom #10: From the top 50, we then look for those that have had the worst performance over the past week. This identifies stocks that may be experiencing a temporary dip.
• Zacks Rank #1: Stocks with a Zacks Rank of 1 (Strong Buy) have a track record of outperforming in various market conditions.
• Momentum Style Score of B or Better: A high Momentum Style Score indicates that a stock is well-positioned to benefit from its current momentum. This score considers factors such as volume changes and relative performance to peers.
• Current Price greater than $5: Ensures that the stocks are accessible to a broad range of investors.
• Market Capitalization = Top #3000: Focuses on larger companies with more stable price movements.
• Average 20-Day Volume greater than 100,000: Indicates that the stocks are actively traded, making them easier to buy and sell.

Highlighting Top Momentum Stocks

Several stocks have made it through this rigorous screening process. Here are three notable examples:

Urban Outfitters, Inc. (URBN): Based in Philadelphia, PA, Urban Outfitters is a lifestyle specialty retailer offering fashion apparel, accessories, footwear, home décor, and gifts. The company operates in the U.S., Canada, and Europe. Over the past year, the stock has risen by 63.6%, but it declined by 4.2% in the past week. It has a Momentum Score of B.

Royal Gold, Inc. (RGLD): Headquartered in Denver, CO, Royal Gold acquires and manages precious metals stream and royalty interests, primarily focused on gold. The company benefits from a diversified portfolio of mining-related investments. The stock has increased by 22% over the past year but dropped by 9.8% in the past week. It has a Momentum Score of A.

Kodiak Gas Services, Inc. (KGS): Based in The Woodlands, TX, Kodiak Gas Services provides contract compression infrastructure for oil and gas companies in the U.S. The company plays a critical role in the production and transportation of natural gas and oil. Over the past year, the stock has gained 25.3%, but it fell by 3.8% in the past week. It has a Momentum Score of A.

Leveraging Tools for Investor Success

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