‘Power Ratings’ Momentum Stocks Continue Rise, Beating the Market
Talk about your Big Mo.
Momentum stocks, as defined by The Times’ Power Ratings screen, have once again trounced the market overall.
The top 25 stocks in the latest update of our Power Ratings screen, published Dec. 14, are up an average of 96% since then, versus a loss of 0.8% for the Standard & Poor’s 500 index of blue-chip stocks.
The Power portfolio even outdid the scorching run of the Nasdaq composite, which has rallied 37% since Dec. 14.
Never mind the presidential race--these momentum stocks have had plenty of Super Tuesdays . . . and Wednesdays, Thursdays, etc.
Twenty-two of the 25 stocks on the Dec. 14 list have gained, led by biotech firm Protein Design Labs Inc. (ticker symbol: PDLI), up 539%, and Internet infrastructure firm InfoSpace (INSP) Inc., up 255%.
The Power Ratings, based on data from Zacks Investment Research of Chicago, are designed to show which stocks have the greatest recent upward--or downward--momentum by three measures: share price, analysts’ earnings estimate revisions, and analysts’ overall ratings of the stocks.
In a market like this, hot stocks often stay hot, as their strong gains attract other investors. That’s one definition of “momentum” investing.
But by factoring in earnings estimate revisions, the Power Ratings methodology also looks for companies whose fundamentals appear to be improving as well.
The top Power Ratings stocks have generally been good performers since we introduced this feature about a year ago, beating the market on average in the following two to three months each time.
But there have been notable duds: Nasdaq stock dealer Knight/Trimark Inc. (NITE), for example, topped one Power Ratings list last spring--just before the bottom dropped out on that stock.
What’s more, the ever-present danger is that the momentum game in general will collapse. The higher these stocks go relative to underlying earnings (if there are any), the risk of chasing them increases as well.
The new Power Ratings list, which accompanies this story, is dominated as usual by technology names. But it represents a shift from previous portfolios: Reflecting market sentiment, it has a lot more biotech and a little more telecom than in the past--and even one oil stock.
Here’s a look at some of the stocks at the top of the new Power Ratings portfolio:
* Terayon Communications Systems (TERN) of Santa Clara, Calif., makes equipment for high-speed Internet access over cable TV lines. With a market capitalization of $5 billion, it’s one of the bigger stocks on the list.
The stock got a lift in mid-February when newsletter publisher George Gilder touted the “decisive superiority” of the company’s cable-modem technology, comparing it with Qualcomm Inc.’s wireless standard (an assessment some other analysts have since disputed). Terayon recently partnered with Next Level Communications Inc. in an effort to develop a system that would enable phone companies to offer video services over digital subscriber lines more cheaply.
* ArQule Inc. (ARQL) of Medford, Mass., with a market cap of $379 million, develops technology for improving the efficiency of the drug-delivery process. In January its research contract with Monsanto Co.’s Searle division was extended through 2002, and the stock has since shot up to $29.50 from $12.
* Patterson Energy (PTEN) of Synder, Texas, with a market value of $862 million, specializes in oil and gas drilling services and exploration. Of the top 25 issues on our list, this is the only one outside the sectors of tech, telecom, biotech or medicine. The stock has doubled this year as crude has shot past $30 a barrel. Patterson recently announced a fourth-quarter profit of 1 cent a share, versus a 19-cent loss in the year-earlier period. But not everyone is convinced Patterson’s best days are coming: An analyst at Burns, Gustus & Co. recently rated the stock a “sell.”
* Pharmacopeia Inc. (PCOP) of Princeton, N.J., with a $1.4-billion market cap, provides contract services that help drug companies with research and development. The stock, recently reiterated “aggressive buy” at Punk Ziegel & Co. and “strong buy” at Deutsche Banc Alex. Brown, has tripled this year.
* Brooktrout Inc. (BRKT) of Needham, Mass., with a market value of $517 million, supplies computer and telecommunications products. The company, whose Voice Browser and other devices focus on “blending phones, PCs and the Internet,” recently reported fourth-quarter profit of 37 cents per share, versus 16 cents in the year-earlier period. Profit is expected to grow to $1.45 a share in 2000, from 88 cents in 1999.
* ImClone Systems Inc. (IMCL) of New York, with a $4.8-billion market cap, is another biotech firm--indeed, five of the top 10 companies on our list are in that field. ImClone was issued a Japanese patent last week for its DNA-probe technology. The stock was recently tabbed by Anders Hove, a fund manager with little-known BB Biotech, as a favorite pick among lesser-known names, along with Alexion Pharmaceuticals (ALXN) and Celgene Corp. (CELG).
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Josh Friedman can be reached at josh.friedman@latimes.com.
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Tart holdStrong and the Weak
The Los Angeles Times Power Ratings rank stocks based on growth-oriented criteria: share price momentum, earnings forecasts and analysts’ recommendations. Using a formula designed by The Times, Zacks Investment Research screens its 6,600-stock universe for those with strength-or weakness-in three equally weighted categories: percentage change in share price over the last 12 weeks, through Friday; percentage change, also over the last 12 weeks, in analysts’ consensus earnings-per-share (EPS) estimate for the company’s current fiscal year; and analysts’ consensus rating (1.0 equals “strong buy” and 5.0 equals “strong sell”). Zacks ranks the stocks from 1 to 6,600 in each of the three categories, then averages those rankings to derive an overall power rating. The top 25 and bottom 10 stocks are listed. Although no one should make decisions based solely on a stock screen-and The Times is not recommending buying or selling any of the companies listed-growth-oriented investors may be interested in seeing which companies have been showing strength or weakness in recent months. Along with the criteria used in the screen, the chart lists Monday’s closing price and the number of analysts covering each company.
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Notes: Companies with share prices below $5 and those covered by fewer than three analysts are excluded.
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Source: Zacks Investment Research (For more information on Zacks Investment Research, visit https://www.zacks.com.)
