Momentum Stocks: A Simple Momentum Strategy That Lowers Your Risk

One of investors' greatest challenges is to create a portfolio that meets their requirements for return while minimizing risk. The task is challenging on its own, but when you add the market volatility, interest rates, and the uncertain economic future, it's no wonder investors are banging their heads against the wall.

Seeking Alpha contributor, "Ploutos" presents his answer for "improving your return profile with a simple momentum strategy." It's quite simple, too...

Essentially, he compared historical returns between a portfolio with 100% stocks and a portfolio that alternated between 100% stocks or 100% bonds every month, depending on which outperformed in the prior month. We refer to the latter as the "momentum portfolio."

Specifically, he compared monthly returns from 1976 to 2011 from the iShares Barclays Aggregate Bond Fund (AGG), the most commonly referenced fixed income benchmark, and the S&P 500 Index (SPDR S&P 500 ETF (SPY)).

"When we annualize these monthly returns and the standard deviation of these returns, we get some extraordinary results." Indeed, his findings show that the two portfolios gave nearly the same returns.

But what's most interesting from an investment standpoint is that the alternating "momentum portfolio" only had about two-thirds the standard deviation, or two-thirds the risk, of the 100% equities portfolio. A third less risk is nothing to sneeze at.

"Ploutos" concludes that by simply rotating a portfolio between equities and bonds with the best trailing performance, or "momentum," an investor can get nearly the same returns with a lower expected level of risk.

Do you agree with this strategy?

Business section: Investing ideas
If you're looking for momentum ideas, the following list might offer a good starting point.

For ideas, we collected data on institutional money flows, and identified five rallying stocks that have seen significant institutional buying during the current quarter. All of the stocks mentioned below are trading above the 20-day, 50-day, and 200-day moving averages.

Big money managers have extensive resources to analyze investing ideas. So if they're buying a certain stock, it's worth paying close attention.

To further refine the quality of the list, we collected data on insider transactions and identified a list of rallying stocks that have seen significant insider buying over the last six months.

Smart money investors, like big hedge fund managers and company insiders, think these momentum stocks are going to keep rising -- do you agree?

Use this list as a starting point for your own analysis. (Click here for more interactive tools.)

1. Colfax (NYSE: CFX): Designs, manufactures, and distributes fluid handling products that transfer or control liquids in various applications worldwide. The stock has gained 71.06% over the last year, and is currently trading 10.79% above the 20-day SMA, 12.52% above the 50-day SMA, and 34.50% above the 200-day SMA. Net institutional purchases in the current quarter at 5.8M shares, which represents about 17.29% of the company's float of 33.54M shares. Over the last six months, insiders were net buyers of 53,111 shares, which represents about 0.16% of the company's 33.54M share float.

2. CoreSite Realty (NYSE: COR): Operates as real investment trust in the United States. The stock has gained 40.15% over the last year, and is currently trading 6.24% above the 20-day SMA, 12.72% above the 50-day SMA, and 21.13% above the 200-day SMA. Net institutional purchases in the current quarter at 1.5M shares, which represents about 7.8% of the company's float of 19.24M shares. Over the last six months, insiders were net buyers of 14,906 shares, which represents about 0.08% of the company's 19.24M share float.

3. Idenix Pharmaceuticals (Nasdaq: IDIX): Engages in the discovery and development of drugs for the treatment of human viral and other infectious diseases in the United States and Europe. The stock has gained 165.89% over the last year, and is currently trading 59.29% above the 20-day SMA, 80.85% above the 50-day SMA, and 145.18% above the 200-day SMA. Net institutional purchases in the current quarter at 2.7M shares, which represents about 4.25% of the company's float of 63.49M shares. Over the last six months, insiders were net buyers of 50,590 shares, which represents about 0.08% of the company's 63.49M share float.

4. InfoSpace (Nasdaq: INSP): Develops search tools and technologies that assist consumers with finding content and information on the Internet. The stock has gained 44.15% over the last year, and is currently trading 6.23% above the 20-day SMA, 20.09% above the 50-day SMA, and 29.91% above the 200-day SMA. Net institutional purchases in the current quarter at 1.7M shares, which represents about 5.29% of the company's float of 32.13M shares. Over the last six months, insiders were net buyers of 84,178 shares, which represents about 0.26% of the company's 32.13M share float.

5. SonoSite (Nasdaq: SONO): Develops, manufactures, and distributes hand-carried ultrasound systems for use across medical specialties and in a range of treatment settings. The stock has gained 53.27% over the last year, and is currently trading 0.11% above the 20-day SMA, 15.93% above the 50-day SMA, and 49.44% above the 200-day SMA. Net institutional purchases in the current quarter at 499.1K shares, which represents about 3.69% of the company's float of 13.51M shares. Over the last six months, insiders were net buyers of 5,000 shares, which represents about 0.04% of the company's 13.51M share float.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.

List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Institutional data sourced from Fidelity, Insider data sourced from Yahoo! Finance.