- A tiny stock just doubled without any rationale.
- Mysterious market forces often trump fundamentals.
- How high will shares go?
- Also recommended: Stocks go up 100% of the time when this happens…
What’s the deal with Everspin Technologies Inc.?
The company is under heavy buying pressure, and momentum will likely push shares above $30 before the end of the month.
Whenever momentum hits such levels, I always take a peek under the hood.
Is it possible that Everspin is disrupting an existing industry?
Here’s what I discovered…
Everspin specializes in the development of random-access memory (RAM), which has been around for over 50 years.
Not a single technology invented in the 1960s can push shares from $9 to $22 in six weeks.
So it must be “special” RAM, right?
Well, kind of…
Everspin calls it “MRAM” — a type of memory that retains information even in the absence of power.
Knowing that MRAM can survive a grid meltdown or a catastrophic power failure gets us closer to quantifying the stock’s vertical ascent.
The company also touts a few high-profile customers like Broadcom, NXP and STMicroelectronics.
Heck, even sales are up 27% in the latest quarter.
Still, those metrics alone don’t justify the stock doubling since late May.
This is simply a case where momentum has overpowered reason.
Momentum is a powerful force to invest behind.
Hutch’s full report on momentum can be found below.
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily
Question: Today we’ll be discussing momentum investing, which is founded upon the belief that stocks in motion will tend to stay in motion.
Let’s jump right in, Martin. How do you define a momentum stock?
Martin Hutchinson: A momentum stock is one that has shown stronger and persistent trends recently. So a momentum investor buys stocks with positive momentum and sells short those with negative momentum.
And there are a number of advantages of this, and the first is the fundamental fact that the market is not efficient. It doesn’t move in a random walk. If the market were a random walk, which is what people believed for a long time and modern financial theory says it is, then momentum investing wouldn’t work.
But the fact remains is that trends do persist more than would be indicated by chance. So there is some value in momentum investing. It’s just difficult to do. But you can make money doing this.
You can make money jumping into strong stocks in bull markets and weak ones in bear markets. If the stock and the market are going the same direction, the momentum is obviously more likely to persist.
There are cases where this has been highly profitable.
The most obvious case recently is holding on to the FAANGs for a long period. If you’d bought Facebook, Apple, Netflix, Google or Amazon, say, five years ago, then the thing to do wasn’t to jump in and out of those. The strategy was just to shut your eyes and hold onto them. And of course, you’d have made eight, 10 times your money, depending on the stock.
On the bear side, it can also be useful. Stocks can enter a death spiral where they can’t get finance. So selling companies with strong negative momentum, or buying puts on them, can be a very profitable strategy.
Question: Hutch, tell us, what are the snags?
Martin Hutchinson: There are a number of disadvantages.
Firstly, with momentum investing, you tend to buy stocks that have gone up a lot. So you may be buying stocks that are overpriced.
You’re paying no attention to fundamentals, and those can be important. You’re paying no attention to value, and that can be important.
And fashions can change, and markets can crack — quickly.
An example of that is oil in 2014, which went from $100 to $50 a barrel, and all the oil stocks fell out of bed.
Momentum investing is a short-term strategy because momentum factors can change quickly. So you can get whipsawed by sudden change.
Question: OK, Hutch, before we break, let me give you the final word on momentum investing. What do you suggest? What strategy should our readers be putting forth?
Martin Hutchinson: I don’t think you should use it as your only investing strategy. But you can certainly combine it with value, dividends and other strategies — and use it for short-term trading.
If you’re just looking to make a quick profit in the next two or three months and there appears to be a really strong trend, then by all means, momentum investing can work.
Question: So it’s fair to say you better have genuine conviction to go short in a bull market on a stock that’s under positive momentum. And then conversely, the same thing in a bear market — where a stock is in negative momentum. You better have genuine conviction if you’re going to pull that trigger. Is that accurate?
Martin Hutchinson: That’s absolutely right. And in particular, if you’re buying put options or taking a bear position in a stock that looks very expensive, you’d better not do it while it’s still going up.
Question: OK, fair enough. Thanks for your time today, Hutch.
Martin Hutchinson: Great to be with you.
Question: This is Wall Street Daily, signing off.
Senior Analyst, Wall Street Daily