5 hot stocks for a cold market

By Harry Domash

Editor's note: To view the stock screens mentioned in this column, download the free MSN Money Investment Toolbox.

Bummed out by the market? You don't need to be. Technology stocks may be struggling, but Axsys Technologies (AXYS, news, msgs) is up about 28% in three months. Detroit may be crumbling, but Fuel Systems Solutions (FSYS, news, msgs), which makes parts that help vehicles run on alternative fuels, has more than doubled in three months.

Forget the recession -- let's make some money. Someone always does.

Momentum investors, such as the hot hands at hedge funds, know how to find stocks defying the odds. They don't let oil prices, interest rates or the economy stop them. Instead, they look for what's working now and ride the trend until it stops. When it does, they jump on the next one.

Momentum players search for stocks that are already outperforming the market. But that's not enough. The underlying companies must be profitable and have racked up strong recent earnings and sales growth. There's even more. Momentum strategies require pinpointing the stocks in this already-hot group that are getting even hotter.

I'll fill you in on the details as I describe my screen for finding hot stocks in this not-so-hot market.

Outperforming the market

One of the more interesting things I've discovered about investing is that stocks that have already outperformed the market, as a group, tend to keep winning. Conversely, underperformers are likely to continue to disappoint.

Relative strength measures a stock's price performance compared with the overall market. For example, a relative strength of 80 means that a stock has outperformed 80% of all stocks. Interestingly, high relative strength is an ingredient common to many successful stock-picking strategies, both value and momentum.

MSN's Stock Screener offers three relative-strength search time frames: three months, six months and 12 months. Most momentum strategies focus mainly on 12-month relative strength, so I start there and require a minimum 90% relative strength over the past 12 months.

Screening parameter: 12-Month Relative Strength >= 90

To ensure that the stock isn't flaming out, I also check the shorter time frames, though with less stringent requirements. Specifically, I require 85% relative strength for the past six months and 80% over the past three months.

Screening parameter: 6-Month Relative Strength >= 85

Screening parameter: 3-Month Relative Strength >= 80

Strong price chart

A momentum-stock candidate should be in a strong uptrend. In a strong market, high-relative-strength stocks would, by definition, also be in strong uptrends. However, in a weak market, a stock that is outperforming other stocks isn't necessarily in an uptrend.

Comparing a stock with its moving average (average closing price over a specified number of days) is the best way to determine which way a stock is trending. Stocks trading above their moving average are in uptrends; those trading below are in downtrends. The bigger the distance between the stock and its moving average, the stronger the trend.

The 50-day and 200-day moving averages work best for most screens. The 200-day moving average identifies long-term trends, while the 50-day moving average reflects short-term action. For instance, a stock trading above its 200-day moving average would be in a long-term uptrend. But it would be in a short-term downtrend -- i.e., a dip -- if it's trading below its 50-day moving average.

Momentum candidates should be in strong uptrends, both short and long term. Such stocks typically trade further above their 200-day MAs than above their 50-day averages. I require that passing stocks must be trading at least 25% above their 200-day MAs and at least 10% above their 50-day MAs.

Screening parameter: Last price >= 1.25 * 200-Day Moving Average

Screening parameter: Last Price >= 1.10 * 50-Day Moving Average

Continued: Strong stock behavior

 1 | 2 | next >