Time To Buy High Growth Momentum Names Hand Over Fist
Throughout my investment career I've found that one of the most useless exercises is speculating on the "why" when asset prices move. That practice is, for the lack of a better phrase, mental masturbation. No you don't step into a trade without a thesis, whether that be fundamental, technical, or quantitative, but attempting to manage positions by understanding the "why" for every hem and haw of the market is a fool's game.
Paying attention to price action within the trend is the most important aspect of risk management and thus generating quality absolute returns over long periods of time.
I've focused most of my career on high growth, high momentum names. Save for deep value strategies, which are only successfully executed by a tiny group of money managers, high growth and momentum is where the vast majority of opportunity in the market lies for discretionary equity traders.
There are two times within the trend when these types of names should be bought. When a stock leads the broader market to new highs off of a wide base of support, and when momentum names as a whole have been unanimously thrown out the door for a few weeks and trade at very low RSI levels.
We are currently seeing an excellent example of the latter, and it predicates buying these names hand over fist on Monday in advance of significant mean reversion to the trend. Think of it as the rubber band snapping back after being stretched too far.
Below is a chart showing just how incredibly fast and merciless the shellacking of these names has been over the past few weeks. It has been vomit inducing for many long/short growth fund managers. According to Goldman Sachs equity research:
"The past 5 trading days [for GSTHHVIP, a proxy for hedge fund positions] rank in the lowest 2% of returns since May 2001"
The relevant chart is at the top left, and it's a doozy.
A perfect individual example of what's taken place here, and the opportunity that it currently presents is seen in Athenahealth (ATHN).
While ATHN was significantly overbought in early March according to the RSI reading at the bottom, the resulting selloff has been non stop and leaves the stock well oversold.
The following two charts (click through for interactive charts) from Estimize paint the picture of the massive momentum in revenue growth that the company is experiencing and why it fits into the bucket of a typical momentum name held by many hedge funds today.
As I said, speculating as to why these names have been hammered so hard is a useless exercise. If we begin to see revenue growth estimates across the board in these names start to come down significantly over the next few weeks we'll have a better idea, which could signal tough going in the intermediate term.
But on Monday it is prudent that for momentum traders these stocks are bought, hand over fist, as mean reversion to the trend is likely to take place.
