By Ian Salisbury
Investors betting on the "momentum" strategy have had it good lately -- until this week. It might be time to consider some new plays.
Momentum investors buy stocks that have outperformed in the recent past, in a bet that their upward momentum will continue in the near future. But Monday's big DeepSeek sell-off upended that thesis -- body-checking the strategy's performance and throwing up a new crop of stocks that could be momentum winners later this year.
"The sell-off in the long Momentum factor on Monday was...the third-largest decline in 40 years," wrote JPMorgan strategist Dubravko Lakos-Bujas in a note Tuesday. "This was triggered by a sharp decline in stocks tied to AI Infrastructure plays."
Recent reports suggested that DeepSeek, a Chinese competitor to artificial-intelligence companies, appears to be nearly as good as established players like ChatGPT -- without relying as heavily on the most costly computer chips. Its apparent success raised questions about the tens of billions of dollars U.S. tech firms have been investing in the AI arms race.
The iShares MSCI USA Momentum Factor exchange-traded fund -- with top holdings that include hard-hit stocks Nvidia, Broadcom and Constellation Energy -- is down 3% this week, compared to just 0.6% for the S&P 500. Although it's worth noting that over the past 12 months the fund has returned 29%, five percentage points better than the broader market.
The dust-up means momentum investors might want to look for some new names, adds JPMorgan, which published a slate of 13 stocks it thinks could be momentum picks going forward. The list includes several financials including Nasdaq, Blackstone, Northern Trust, and Bank of America.
Bank of America was among a crop of big banks that reported strong earnings earlier this month, helping drive gains across the sector. Bank of America's fourth-quarter profit more than doubled to $6.7 billion, and the company beat analysts' forecasts, as investment banking revenue surged 44%.
"Consumers continue to spend at a solid and healthy rate," said CEO Brian Moynihan on the company's latest earnings call. "We finished 2024 with good momentum as we enter '25."
While the tech was the culprit in momentum's recent selloff, JPMorgan's picks did include two tech names: Trimble, which sells precision measurement technology, and cloud-services provider Hewlett-Packard Enterprise. Texas-based HPE (not to be confused with printer maker HP) has returned 9.7% in the past three months after strong server demand led to better-than-expected fourth-quarter results last month. The shares still trade at just 10 times 2025 earnings, according to FactSet.
Other stocks on the JPMorgan list: Cruise operators Carnival and Norwegian Cruise Line Holdings. This sector was hit particularly by the Covid-19 pandemic, but demand has come back. That is evident in their stocks' performance as well: Shares of Carnival have gained 69% in the past year, while Norwegian's are up 60%.
"Booking and pricing environment remains strong heading into 2025," wrote Truist analyst Patrick Scholes in a note on the sector earlier this month. "U.S. dollar appreciation relative to the euro is expected to act as a tailwind for European cruise demand in the summer of 2025 and we note that CCL and NCLH have large exposures to Europe," he wrote, referring to the two companies' trading symbols.
Write to Ian Salisbury at ian.salisbury@barrons.com
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(END) Dow Jones Newswires
January 30, 2025 03:00 ET (08:00 GMT)
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