Chasing momentum stocks can come with quick rewards, but get the timing wrong and you might just find yourself on the wrong side of a sudden reversal in momentum. Undoubtedly, if a stock can gain by double-digit percentage points in just a few weeks or months, you can bet that a sharp plunge might just follow, giving back all the explosive surges at the drop of a hat. Indeed, buying a robust rally with the expectation of more of the same could lead to fairly mixed results.
While many beginner momentum investors might buy a stock solely because of recent upside action in the share price, I’d argue that doing so without proper valuation isn’t the best move in the world. Of course, upside momentum itself isn’t a reason to steer clear of a stock, provided that something fundamental has improved by much more than a recent move suggests. Still, if recent developments have increased your estimate of a company’s actual worth, then buying, regardless of the past-year chart, might be the best move.
Just be aware that high volatility can cut both ways. And investors should also have a game plan for the way down, once momentum turns negative for some reason or fizzles out. If you’re looking for a quick trade, things could certainly get risky in a hurry.
However, if you plan to buy shares on a dip, it can make sense to be a net buyer despite any overbought conditions, provided you see value. In this piece, we’ll look at two momentum candidates that look compelling going into the year’s end.
While I do tend to shy away from momentum, I think the following pair of names has actual earnings and strengthening fundamentals to support the share price and further gains.
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Aritzia
Aritzia (TSX: ATZ) stock has been roaring of late, now up 63% in the past six months and over 105% year to date. I’ve been a massive fan of the stock over the past year, and I’m not about to turn negative just because shares are melting up, virtually going parabolic in the last couple of weeks.
At the end of the day, Aritiza is the mid-cap growth story to stash away for the long haul. The $12.8 billion company still has a world of market share to take as it continues its ambitious expansion across Canada and into the U.S. Sure, the 46 times trailing price-to-earnings (P/E) seems excessive, but the firm is doing everything right and could continue its hot run through 2026.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) is up around 35% in the past six months after clocking in some phenomenal quarterly earnings results. Despite the surge, shares of the big bank go for a modest 18.5 times trailing P/E. With a 4.5% dividend yield and a lot to offer investors, if shares finally break out, I’d hang on as more solid quarters seem likely than not.
The big banks are back, and Bank of Nova Scotia might have the most room to run of the Big Six. With a 1.3 beta, though, do be ready to buy the dips in the name should bank earnings yield a few unexpected surprises. Either way, BNS stock is a dividend powerhouse that’s still worth adding to as shares near $100 per share.
