Today, I want to identify two rare momentum stocks in a market environment that has little momentum right now. But first, let’s talk about market timing.
In our view, one of the most underrated aspects of successful investing is what Jesse Livermore referred to as the time element—moves in the market (up, down or consolidations) take time, partially due to psychology (it takes time for investors’ point of view to change) and partially because of mechanics (it takes weeks for mutual, pension and hedge funds to reposition their portfolios).
That’s a big reason why for many growth stocks, less is probably more at the moment. Take a look at Tesla (TSLA), which broke out near 175 after the pandemic and mushroomed above 900 before finally cracking with the market lately.
It’s now nine weeks into this correction and consolidation. Could it immediately get going from here? Sure, anything’s possible, but after a big run and decisive break, odds favor stocks like TSLA (and many others) needing more time to wear out the weak hands before resuming their advances. (And some, of course, might not resume their advance at all.)
Conversely, while it’s early, we’re beginning to spot many growth-y names that topped out a few weeks ahead of the Nasdaq that look ready (or nearly ready) to get going … if the market cooperates, of course. Here are three momentum stocks to keep an eye on.
3 Momentum Stocks on the Rise
DraftKings (DKNG) is a good example. The stock’s peak came back in September and spent many months slowly recuperating; only recently has the stock nosed out to new highs as most of the weak hands have been worn out.
Then there’s ZoomInfo (ZI), as the stock is actually still in the midst of a huge post-IPO base from June of last year—while shares got hit after earnings when the market was tanking, this week’s big-volume spike puts the stock within a few points of all-time highs. This is a new stock that’s liquid and has the sales, earnings and story that could propel it much higher.
Finally, there’s a name like LGI Homes (LGIH), a mid-sized homebuilder (10th largest in the U.S.) with an excellent track record of growth thanks to its focus on first-time buyers and in many of the fastest-growing areas of the country (southeast, Florida, etc.). And the pandemic has boosted business in a huge way—Q4 results saw sales (up 48%) and earnings (up 106%) blow away expectations while its backlog was up a ridiculous 167% from a year ago. And momentum has remained strong, with home closings up 36% so far this year vs. 2020.
LGIH effectively peaked in August (though it did hit a minor new high in October), making no net progress for seven months. But now it’s moving, notching new price peaks (though the relative performance line is still lagging a bit) on a beautiful trading volume cluster of late—and some others in the homebuilding group have perked up too.
Whether these names push higher from here will be all about the market environment, but so far, we’re seeing more peppy action among growth stocks that have already rested for a few months, while those that just topped in February still look tired.
*This post was excerpted from the latest issue of Cabot Growth Investor.