Momentum stocks can seem pretty darn great at the time. These companies are on the way up, and it can seem like they’re never going to come down at the time. That is, until they do.
That’s why today we’re going to look at ways to identify momentum stocks that won’t drop — ones that have been climbing steadily for years and can even give you a boost from time to time. So, let’s get into it.
What’s clear is that momentum stocks tend to climb because investors are excited about them. There’s a general feeling that the company will continue with success, and that’s a huge part of the climb in share price.
The issue here is that you can’t really track the sentiment of the market. Plus, this can be contributed to by Wall Street and Bay Street recommendations. Therefore, this can lead to a drop in share price overnight in some cases.
That’s why you want to identify momentum stocks that have consistent recommendations and investor excitement. That, of course, can be quite difficult, which is why we need more information here.
Look behind and ahead
Another way to identify strong momentum stocks is to get into the company’s charts. You want to see charts that are stable over time and, hopefully, a long period of time. However, you should be able to identify this by looking at the “moving average” of the company’s stock price.
Then, you’ll be able to look beyond the changes that happen day after day. Instead, you can look at long-term changes in the market and whether those are positive or negative. Ideally, you should be able to look back a decade or longer to see that the company has climbed, so even with some momentum, it doesn’t crash and burn afterwards.
Investors should then be able to go on and compare the stock both with itself and with peers. How are comparable stocks performing in the market? Are they also surging and considered momentum stocks? This could actually be a bad sign.
If the market is climbing, that could mean there is a dip due. But if the company itself is climbing from its own momentum, then that is far more positive. Then, compare the company’s past returns. If year after year, it looks like there are similar returns, then that could again be good news that it’s going to continue.
A prime example
So, if you’re looking for a top momentum stock due to continue climbing, I would consider Constellation Software (TSX:CSU). This company received a boost as a tech stock in the last few years, certainly. However, it acquires essential software companies. It then provides them with the backing they need to thrive.
The stock has also been doing this for over a decade and since 1995, when it was founded. Its management team has identified the best ways to pick up these software companies, proving their worth again and again.
So, while Constellation stock may be up 55% in the last year, and that’s a lot of momentum, that’s on the back of over a decade of growth. In fact, even during the pandemic, the tech crash, recessions and more, Constellation stock has remained strong. So, it’s certainly one of the momentum stocks I would consider today.