Momentum investing revolves around the idea of following a stock's recent trend in either direction. In the 'long' context, investors will be essentially be "buying high, but hoping to sell even higher." With this methodology, taking advantage of trends in a stock's price is key; once a stock establishes a course, it is more than likely to continue moving that way. The goal is that once a stock heads down a fixed path, it will lead to timely and profitable trades.
While many investors like to look for momentum in stocks, this can be very tough to define. There is a lot of debate surrounding which metrics are the best to focus on and which are poor quality indicators of future performance. The Zacks Momentum Style Score, part of the Zacks Style Scores, helps address this issue for us.
Below, we take a look at Ares Capital (ARCC - Free Report) , which currently has a Momentum Style Score of A. We also discuss some of the main drivers of the Momentum Style Score, like price change and earnings estimate revisions.
It's also important to note that Style Scores work as a complement to the Zacks Rank, our stock rating system that has an impressive track record of outperformance. Ares Capital currently has a Zacks Rank of #2 (Buy). Our research shows that stocks rated Zacks Rank #1 (Strong Buy) and #2 (Buy) and Style Scores of A or B outperform the market over the following one-month period.
You can see the current list of Zacks #1 Rank Stocks here >>>
Set to Beat the Market?
In order to see if ARCC is a promising momentum pick, let's examine some Momentum Style elements to see if this private equity firm holds up.
A good momentum benchmark for a stock is to look at its short-term price activity, as this can reflect both current interest and if buyers or sellers currently have the upper hand. It's also helpful to compare a security to its industry; this can show investors the best companies in a particular area.
For ARCC, shares are up 0.32% over the past week while the Zacks Financial - SBIC & Commercial Industry industry is up 0.18% over the same time period. Shares are looking quite well from a longer time frame too, as the monthly price change of 4.47% compares favorably with the industry's 3.39% performance as well.
Considering longer term price metrics, like performance over the last three months or year, can be advantageous as well. Shares of Ares Capital have increased 5.74% over the past quarter, and have gained 10.18% in the last year. On the other hand, the S&P 500 has only moved 4.45% and 5.9%, respectively.
Investors should also pay attention to ARCC's average 20-day trading volume. Volume is a useful item in many ways, and the 20-day average establishes a good price-to-volume baseline; a rising stock with above average volume is generally a bullish sign, whereas a declining stock on above average volume is typically bearish. ARCC is currently averaging 1,505,268 shares for the last 20 days.
The Zacks Momentum Style Score encompasses many things, including estimate revisions and a stock's price movement. Investors should note that earnings estimates are also significant to the Zacks Rank, and a nice path here can be promising. We have recently been noticing this with ARCC.
Over the past two months, 8 earnings estimates moved higher compared to none lower for the full year. These revisions helped boost ARCC's consensus estimate, increasing from $1.80 to $1.86 in the past 60 days. Looking at the next fiscal year, 5 estimates have moved upwards while there have been 2 downward revisions in the same time period.
Taking into account all of these elements, it should come as no surprise that ARCC is a #2 (Buy) stock with a Momentum Score of A. If you've been searching for a fresh pick that's set to rise in the near-term, make sure to keep Ares Capital on your short list.