Momentum is defined as the driving power, strength, or force gained by motion or by a series of events. When we speak of an object gaining momentum, we usually point out the moment that something changed, causing the momentum to begin. In sports, that could be a turnover in football or a big hit in baseball, during which the atmosphere of the stadium, from the players to the crowd, changes for the better -- or, sometimes, worse. Either way, once the momentum changes, it's difficult to reverse in the short term unless a new catalyst is introduced. Therefore, it usually must simply play itself out over a longer period of time.
In 2012, for example, the Dow Jones Industrial Average's (^DJI -1.24%) best-performing stock was Bank of America (BAC -1.71%). Shares ended the year up more than 100%. But since the beginning of 2013, during a time in which the Dow is up 6.91%, or nearly what it gained in all of 2012, shares of the bank have suddenly lost their momentum, having risen by only 0.86% so far, and the stock is now the second worst-performing Dow component year to date.
The period from the end of December and the beginning of January is a popular time for investors to make changes to their portfolios. You can cash in some of your big winners while dropping your losers to help offset your taxes for the year. I believe this was the catalyst that has stopped the momentum Bank of America had built up during 2012. Yes, the company recently announced earnings that weren't great, but as my Fool colleague John Maxfield pointed out, once you cut through the noise, they weren't all that bad, either. The bank is getting stronger every quarter and recently settled a number of lawsuits and claims pertaining to the financial crisis and past mortgage fraud, which removed a large part of the company's future liabilities. In my opinion, the company is healthier than it's been in years, yet it's still trading for less than book value as its shares sit dead in the water in 2013.
On the other hand, Hewlett-Packard (HPQ -0.43%) ended 2012 down more than 45%, but it's now up more than 15% in 2013. The stock was the Dow's worst performer last year and has now become the best Dow component so far in 2013. The personal computer industry took a turn for the worse in 2012, as shipments stopped growing, with more customers opting to buy tablets instead. And as the world's largest PC manufacturer, HP has been taking some big hits.
Yet as the calendar turned over, the company's problems didn't disappear. In fact, they may have even grown worse. Lenovo, the world's second-largest PC manufacturer, announced earnings last week in which profits rose 34% while the company increased its market share. And that means HP must deal with a stronger competitor that could eat up more of a shrinking market.
On top of all this, HP also recently took an $8 billion writeoff because of what's being called accounting irregularities with its Autonomy unit.
The company has been "restructuring" for a number of years as its core businesses have eroded away, while the company's CEO, Meg Whitman, has told investors it will take several more years for things to change for the better. Watch for this stock to continue to be volatile.
More Foolish insight
Investors shouldn't buy a stock just because it has momentum and is charging ahead with the bulls, nor should they sell just because a stock has lost its driving force and is essentially stuck in the mud. If a raging bull has poor financials behind it, the run higher will only last so long and the fall from grace will be devastating. But if the mired stock has a strong business behind it, the investor who shows patience will ultimately be the winner.
To learn more about the most talked about bank out there, check out our in-depth company report on Bank of America. Or to find out whether HP is truly one of the least-appreciated turnaround stories on the market, check out what The Motley Fool's technology analyst has to say in a premium report in which he details exactly what investors need to know about the company. Just click here now to get your copy today.
