7 hot stocks for a cool market

By Harry Domash

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

So far this year, the market has given us little to shout about. But holders of mining stocks, steel makers, solar stocks, railroads and just about anything connected to the energy industry don't care much. Many of them have enjoyed greater-than-50% returns.

These results illustrate that, to paraphrase singer Jimmy Buffett, there's always a bull market somewhere.

I'm going to borrow from the momentum investors' playbook to build a screen to find stocks likely to record positive returns over the next few months, regardless of what the market does.

Although used by hedge fund managers and other pros with great success, not many individual investors employ momentum stock-picking strategies. Basically, they involve picking stocks with already strong price charts and earnings momentum. I'll fill you in on what I mean by earnings momentum in a minute when I describe the screen.

Because momentum stocks are notoriously volatile, I look for stocks supported by the big-money players, and I add profitability and low-debt requirements to rule out the riskiest stocks. Here are the details:

Earnings mojo

Earnings momentum starts with strong earnings growth expectations, which are best gauged by analysts' earnings growth forecasts. I require a minimum 20% expected growth this year and 15% growth in the next fiscal year.

Though these growth rates aren't particularly strong, the additional earnings momentum factors I'll describe next will limit the field to stocks likely to exceed those forecasts.

Screening parameter: Current Yr. Growth Rate >= 20

Screening parameter: EPS Growth Next Yr. >= 15

Share prices usually reflect earnings growth expectations. All else being equal, if expectations rise, so should share prices. Further, once forecasts start to move, up or down, they often continue on the same path for some time. Momentum players look for stocks with upward-trending earnings forecasts.

Fortunately, MSN Money's stock screener includes a search parameter that detects recent changes in earnings forecasts. (From the "Field Name" drop-down menu, select "Advisor FYI" and then "Analyst Projections.")

Screening parameter: Earnings Estimate Increased Since <In The Last Month>

Nice surprises

Finally, in the earnings department, momentum players look for recent positive earnings surprises.

An earnings surprise is the difference between analysts' forecasts and reported earnings. It's a positive surprise when earnings come in above forecasts and a negative surprise when they fall short. A significant positive surprise -- say, more than 2 cents per share -- typically drives the share price higher. Conversely, negative surprises usually drive down share prices.

What's surprising about surprises is that the effects linger for months. Stocks with recent positive surprises tend to continue to outperform the market and vice versa.

Thus for the most-recent earnings report, I require that a company must have reported a positive surprise. However, I don't require much. Any positive surprise will do.

Screening parameter: Recent Qtr. Surprise % >= 1

Make the trend your friend

Anyone who pays much attention to stock charts knows that stocks usually move in trends. Stocks that have already outperformed likely will continue to record strong results. However, no stock goes up forever.

You can tell which way a stock is trending by comparing it to its moving average (the average closing price over a specified number of trading days). Stocks trading above their moving averages are in uptrends; those below are in downtrends.

For this screen, the 200-day moving average, which detects longer-term trends, works best. However, simply trading above the moving average isn't enough. In my experience, stocks trading slightly above their 200-day averages don't work as well as those trading solidly above their averages. So, I look for stocks trading at least 15% above their 200-day moving averages.

Screening parameter: Previous Day's Closing Price => 1.15*200-Day Moving Average

Continued: Under the radar

 1 | 2 | next >