Nilanjan Choudhury
5 min read
The U.S. stock market seems to be heading in a positive direction, but it’s likely to be a bumpy ride. The Federal Reserve’s decision to leave interest rates as they are suggests that inflation is still a worry, especially with oil prices going up because of tensions between countries. However, investors aren’t getting overly cautious just yet. The S&P 500 has bounced back strongly from its low point in late March, and people are feeling more optimistic, but not to the point where the market is getting too hot.
One important thing that’s helping stocks right now is how well companies are doing with their earnings, especially when it comes to spending on artificial intelligence (AI). The big tech companies are still doing a great job of making money, and AI is becoming a really important area for growth in the market. But even with all this, it’s possible that the market will start to favor picking and choosing specific stocks to invest in, rather than just investing in everything and hoping for the best.
Against this backdrop, relative price strength looks like a sensible strategy. Investors can focus on stocks and sectors already showing leadership, backed by stronger earnings trends and resilient demand.
At this stage, investors would be wise to consider companies such as Kaiser Aluminum Corporation KALU, Seanergy Maritime Holdings Corp. SHIP, Monarch Casino & Resort, Inc. MCRI and Universal Logistics Holdings, Inc. ULH.
Relative Price Strength Strategy
Investors generally gauge a stock’s potential returns by examining earnings growth and valuation multiples. At the same time, it’s essential to measure the performance of such a stock relative to its industry, peers, or an appropriate benchmark.
If you see that a stock is underperforming on fundamental factors, it would be prudent to move on and find a better alternative. However, those outperforming their respective sectors in terms of price should be selected because they stand a better chance of providing considerable returns.
Then again, it is imperative that you determine whether or not an investment has relevant upside potential when considering stocks with significant relative price strength. Stocks delivering better than the S&P 500 for 1 to 3 months, at least, and having solid fundamentals, indicate room for growth and the best way to go about this strategy.
Finally, it is crucial to find out whether analysts are optimistic about the upcoming earnings of these companies. In order to do this, we have added positive estimate revisions for the current quarter’s (Q1) earnings to our screen. When a stock undergoes an upward revision, it leads to additional price gains.
