You ought to be a momentum investor.
Why? All millionaire-maker stocks have momentum. They boast increasing rates of revenue growth. They display pricing power via expanding gross margins. They have a record of raising guidance.
That's right, Fool. I'm talking not about price momentum but business momentum.
But they're often connected. Consider Akamai Technologies
Business momentum, meet price momentum.
And consider this: Of the 304 stocks that produced positive returns last year, 63, or 21%, raised guidance. That is, they enjoyed business momentum. Surely you know some of them: Sequenom
The limits of business momentum
Higher guidance isn't always a perfect indicator of rising prices, of course. American Superconductor
What happened? Growth slowed and margins compressed. In other words, American Superconductor exceeded limited expectations for its business, but it wasn't growing as fast as it once had, and that slowing momentum affected the share price.
This is by no means to be a slight toward American Superconductor. To the contrary; it's a cautionary tale about growth investing and business momentum. You see, even though revenue growth fell from a triple-digit gain in 2007, American Superconductor still boosted sales more than 70% last year. Think about that -- you can grow 70% and still lose momentum.
The beauty of business momentum
So there are limits to what guidance can tell us. Independent of higher margins and accelerating revenue growth, strong guidance says, well, nothing. Combined, these three traits can create a powerful triumvirate.
Witness Potash Corp.
Think of business momentum as a hedge. When we're suffering through a bear market, like we are now, it's the top businesses -- the ones that have momentum -- that will protect and perhaps even grow your portfolio. Or so says history.
Where to find the next great momentum stock? I ran a screen for stocks that:
- Are worth at least $250 million in market value and listed on a major U.S. exchange.
- Achieved a positive return over the past year.
- Raised guidance at least once over the past year.
- Grew revenue by at least 15% annually over the past two years.
- Are expected to boost sales by at least 20% annually over the next two years.
Capital IQ returned 20 candidates, including Netflix
Color me unsurprised. A key tenet of the Rule Breaker philosophy as Fool co-founder and chief rebel David Gardner describes it is that winners tend to keep on winning. That's why he's unafraid to add a 10-year multibagger to the service's portfolio now, in the midst of a deep recession. The odds favor success.
Care to learn more about the process? Click here to take a 30-day free trial to Rule Breakers. Not only will you get access to all of the team's research but you'll also learn the name of that stock. And, as with all of our services, there's never an obligation to subscribe.
Fool contributor Tim Beyers owned shares of Akamai at the time of publication. He's also a member of the Motley Fool Rule Breakers team, which counts Akamai among its recommendations. Netflix is a Stock Advisor selection. The Motley Fool's disclosure policy has never lost momentum.
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