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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 indexes, 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 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 like 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.
More from MSN Money
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 PeopleSupport (PSPT, news, msgs), 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.
| Company | Shares | Last | Market cap. | % chg. YTD |
|---|---|---|---|---|
| Chindex International (CHDX, news, msgs) | 6.8 million | $18.50 | $127 million | 266 |
| Sonic Foundry (SOFO, news, msgs) | 32 million | $3.64 | 121 million | 256.6 |
| iMERGENT (IIG, news, msgs) | 12.2 million | $22.68 | 265 million | 227 |
| AXT (AXTI, news, msgs) | 23 million | $5.16 | 122 million | 147.2 |
| PeopleSupport (PSPT, news, msgs) | 18.5 million | $21.20 | 385 million | 144.3 |
| QuadraMed (QD, news, msgs) | 42 million | $3.05 | 129 million | 112.5 |
| Metallica Resources (MRB, news, msgs) | 84 million | $3.81 | 315 million | 101.6 |
2. Big caps
You already know that the Dow Jones Industrial Average ($INDU) has risen a ton this year, so for this screen my aim was to show you the top momentum candidates in the S&P 500 ($INX). Of the bunch, my favorites are Convergys (CVG, news, msgs) and Waters (WAT, news, msgs). 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 earns a high 30% return on capital. Both have the potential to advance another 50% over the next two years.
| Company | Market cap. | 5-year high | Last price | % chg. YTD |
|---|---|---|---|---|
| NVIDIA (NVDA, news, msgs) | 12.6 billion | $36.30 | $35.95 | 96.9 |
| BMC Software (BMC, news, msgs) | 6.6 billion | $33.70 | $32.64 | 58.9 |
| Cisco Systems (CSCO, news, msgs) | 162 billion | $44.50 | $26.54 | 55.8 |
| Allied Waste (AW, news, msgs) | 4.9 billion | $19.90 | $13.20 | 53 |
| Pactiv (PTV, news, msgs) | 4.4 billion | $33.50 | $33.06 | 52.1 |
| Convergys (CVG, news, msgs) | 3.1 billion | $50.30 | $23.24 | 45.6 |
| Marriott International (MAR, news, msgs) | 17.6 billion | $44.60 | $44.42 | 33 |
| Waters (WAT, news, msgs) | 5.1 billion | $85.40 | $50.58 | 33.9 |
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