If you can flash back to basic physics classes without opening traumatic wounds, you will remember the three laws of motion. They apply to market and stock trends just as much as they do in the physical world.
Rumors, stories, or dozens of other sources can create momentum by causing buying pressure to overwhelm sellers and drive a higher stock price.
We see it all the time in small stocks, especially clinical-stage biotechs.
A story begins to circulate about cancer-killing drugs or treatments that allow one to maintain a diet of bonbons, donuts, and double bacon cheeseburgers, as well as chain-smoking two packs a day but live forever.
When the story proves to be untrue, traders dump the stock, buyers disappear, and the price collapses.
That is not to say that price momentum is unimportant or not a wildly profitable strategy for buying stocks.
It very much is, and almost all the biggest winners in stock market history had powerful momentum.
However, that momentum did not result from stories, rumors, manipulation, or other forces with no staying power.
Instead, research shows that there's a secret to finding companies with the most powerful momentum…
Remember that force determines the strength of motion.
Trends, like anything else, remain in motion as long as there is a force providing the energy needed to sustain movement against friction.
A powerful force needs to drive the price for momentum to drive a stock to continual new highs and allow investors to cash in huge profits.
There needs to be a continual stream of new information that attracts buyers.
That powerful stream of information is fundamental.
The company needs to be constantly improving.
Sales need to be rising quickly.
Those sales need to be turned into rapidly growing profits.
The company must constantly exceed the expectations of the analysts and institutional investors that control massive amounts of buying power.
In 2021, professors from universities in Asia and the United States collaborated on a research paper titled “Twin Momentum: Fundamental Trends Matter.”
They found that the secret to identifying potential winners was finding companies with outstanding fundamentals that attracted massive buying interest and climbed higher almost continuously for a long time.
Think about some of the biggest market winners of the last few years.
NVIDIA (NVDA) has been growing sales and earnings very rapidly, and institutional buyers are just pouring money into the stock.
The stock has climbed almost tenfold since it started attracting institutional buying as the market recovered in 2020.
It is not just the super sexy headline stocks that deliver these returns.
Consider Limbach Holdings (LMB), a stock I recommended to readers in early 2023.
The company is a relatively boring business that provides building contracting services, such as heating, ventilation, air conditioning, plumbing, electrical, and building controls, to design and construct new and renovated buildings.
They changed their business model from contractor-based to working directly with business owners, and profits exploded.
As the fundamentals improved, the stock attracted big money buying, soaring from under $12 to over $70 in less than 18 months.
I can go on for a long time with examples of previous winners, but that will not give you any ideas that will help you unlock massive gains in the future.
Let us look at some companies that have powerful fundamental momentum and are attracting buying interest that could push their stock prices to several multiples of the current quarter’s price.
I know the first Twin Momentum stock well. We (and by we, I mean my wife) usually make the food for our dogs, but when we are stretched for time, we will turn to the food produced by Freshpet (FRPT).
We are not the only ones who like the company’s products, as sales and prices are soaring.
The stock has steadily climbed higher, but profits are expected to continue climbing, taking the stock price higher as well.
Wall Street has continually underestimated this company as Freshpet has beaten analyst estimates by a huge margin in each of the last four quarters.
Analysts have been scrambling to keep up and getting higher estimates, another factor attracting more buying interest from institutions.
Health insurance is not usually considered a high-growth business, but Oscar Health (OSCR) is a company that is used to breaking the rules. The company focuses on technology to gain an advantage over competitors and provide a better experience for policyholders.
Revenues have been growing rapidly, and the company has turned the current situation into profitability.
The earnings gains in the future should be massive and drive the stock dramatically higher.
Wall Street has been optimistic about Oscar’s health prospects, but even that optimism has been too low.
The company has been exceeding analyst estimates every quarter, and analysts are racing to raise their estimates of Oscar Health’s profit potential.
This could be the start of a long run of long-term financial momentum, driving massive stock gains for investors.
A trend in motion will stay in motion as long as there is energy to drive it.
Twin momentum strategies can help you find the companies with the energy to keep climbing for a very long time.
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