18 January 2006

Playing around with S&P Momentum Plays

After an eventful evening of apartment hunting, I thought I'd close out the night with some light reading on some of my favorite stock blogs. The Kirk Report linked to an S&P stock screen picking out some momentum plays. I thought I'd check out their SmartMoney numbers and Morningstar grades, to see if they look interesting beyond the fact that Wall Street is paying attention to these stocks as of late. And perhaps find some competitors that are being unfairly ignored. Before I begin, here's the Business Week article on this momentum stock screen:

By Michael Kaye, CFA

Riding Stocks' Momentum Waves
S&P identifies four promising plays using the theory that what goes up must keep going -- at least for a while
One strategy we at Standard & Poor's like to touch on from time to time is momentum investing. Basically, this approach assumes that what goes up can continue to go up, using the notion that strong investor demand for a stock can continue to feed on itself for a certain period of time.

Our latest screen starts off with a widely used momentum measure: relative strength. This measures a stock's performance over a defined period against that of the broader stock market. Our first search was for stocks that have an S&P 13-week relative strength ranking greater than 90 (meaning over the past 13 weeks they have outperformed 90% of the stock universe).

BULLISH PICKS. We then wanted to ensure that the stocks on our list were attractive in other respects. So we next looked for issues with the highest score of "bullish" under S&P's proprietary technical investing measure. In addition, each stock had to have the highest rank of our proprietary insider activity rating. Favorable insider activity may signal that management and others crucial to a company's success view its prospects favorably.

To avoid speculative issues, we limited our screen to companies whose stock price is above $5 per share and whose market capitalization is greater than $500 million.

When we finished out search, these four names popped up:

Company Ticker
AAR Corp.p AIR
Fossil Inc. FOSL
Humana Inc. HUM
Meridian Bioscience VIVO

Here are some SmartMoney numbers of choice for each of these stocks, as well as their Morningstar grades:

Ticker / 5-year Sales Growth / Net Profit Margin / PEG / ROE / ROA / On-Balance Volume Index / Morningstar Grades (Growth/Profitability/Financial Health)

AIR - (2.62%) - 2.60% - 0.74 - 7.60% - 3.20% - 246 - (C C D+)
FOSL - 16.22% - 8.80% - 0.94 - 16.70% - 11.90% - 163 - (A A A)
HUM - 6.12% - 2.10% - 1.22 - 13.00% - 4.70% - 271 - (C B+ B)
VIVO - 10.73% - 13.50% - 2.35 - 23.40% - 14.70% - 162 - (B B+ A)

The numbers for AIR, in light of its competition, do not look good, as reflected in Morningstar's grades. Apart from its low PEG and Wall Street's keeness for the stock, I'm not impressed. Looking at the industry peers of AIR, complied by Morningstar, I am drawn to Ceradyne (CRDN) with its grades of A+, A, B- as well as its low PEG of 0.5 and high ROE/ROA of 28.4%/12.4%. The markets are noticing CRDN, too, as its on-balance volume index is 147. Less noticed is Flir Systems (FLIR), with similar ROE/ROA numbers to CRDN, but a higher PEG of 1.08, and a lower on-balance volume index of 52.

FOSL looks solid. One industry peer with gaudy ROE/ROA numbers, as well as "triple A" grades, is Forward Industries (FORD).

United Healthcare (UNH) looks more attractive numbers and grade-wise than HUM.

Biosite (BSTE) and Diagnostic Products (DP) receive better grades than VIVO, and have PEG ratios close to 1.0. But their on-balance volume numbers are low, so they aren't momentum plays right now.

So what are we left with for further investigation? The original four stocks spit out by the stock screen (AIR, FOSL, HUM, VIVO) have morphed into something almost completely different. AIR has been replaced by CRDN and FLIR. FOSL is joined by FORD. HUM disappears into the ether, while VIVO lives.

Do I still have a list of momentum plays, or did I create more of a stock salad with these switches? Using some rudimentary technical analysis, and a quick look at stockcharts.com, CRDN and VIVO are clearly on the upward trajectory. FOSL and FORD are also on the rebound after some serious hemorrhaging of investor cash in late '05. FLIR has momentum--the negative kind.

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