Despite a short rebound last week, momentum stocks and related sector exchange traded funds may not regain their previous highs any time soon. However, some higher quality momentum stocks can still hold their ground, Goldman Sachs says.
David Kostin, Goldman’s chief U.S. stocks strategist, said that clients have become more optimistic about a “re-momentum” trade but warns against being overly optimistic, reports Alexandra Scaggs for the Wall Street Journal.
Specifically, Kostin points out that high-flying stocks have only recovered in the six months after a major sell-off 40% of the time since 1980. Additionally, a number of outside factors have supported the stocks when they did make the recovery.
“Successful momentum recoveries have featured falling bond yields, lower volatility and higher-quality stock leadership,” Kostin said in the article. “Typically quality and momentum have positive correlation. However, today it is slightly negative, suggesting momentum has been fueled by stocks with ‘lower-quality’ characteristics.”
On the other hand, higher quality picks, companies with high margins, strong balance sheets and high return on capital, have fallen behind last year’s high flyers. Now, Kostin argues that these higher quality momentum stocks offer above-average prospects for growth and are cheaper than their sector peers.