The strategy behind momentum investing is pretty simple – "Buy high and sell higher".
Unlike value investors that aim to "buy low and sell high", momentum investors will typically look for shares that are trending in an upward direction and purchase shares on the basis that 'winners' will keep on winning.
The returns from momentum investing can be high, but so too are the risks. Momentum stocks can rise rapidly in a short space of time buy they can also fall quickly when the trend eventually reverses. Some recent examples of this have been Blackmores Limited (ASX: BKL) and Bellamy's Australia Ltd (ASX: BAL).
One of the easiest ways momentum investors can identify stocks trending in the right direction is to pay attention to stocks that are making new 52-week highs.
Three shares that could be of interest to momentum investors on that basis include:
Greencross Limited (ASX: GXL)
Greencross shares have enjoyed a great run since the veterinary company rejected a private equity takeover bid valuing the business at $6.75 a share. With the share price now closer to $8 per share, shareholders will be thankful that management did not engage with private equity and that the share price is once again moving in the right direction.
Although the valuation may be of little interest to momentum traders, I think the shares are fairly valued at the moment trading on price-to-earnings (P/E) ratio of around 22.
G8 Education Ltd (ASX: GEM)
G8 Education shares have been trending nicely since the company delivered a record full year result in February this year. The shares are now trading at $4.13 a share and with childcare services looming as a pivotal election issue, I suspect G8 Education shares can continue to track higher from here.
From a valuation perspective, the childcare operator is trading on a P/E ratio of 16 and offers investors a dividend yield of 5.8%. I believe this is an attractive valuation for a company that is expected to grow its earnings at double-digit rates over the next few years.
Vita Group Limited (ASX: VTG)
Vita Group shares have surged more than 123% over the past six months to make it one of the strongest trending stocks on the ASX. The shares smashed through the $4 level yesterday and hit an all time high of $4.20.
Despite such a rapid rise in the share price, Vita Group shares do not appear excessively overvalued. If the company can match its underlying first half net profit after tax figure of $19.4 million, the shares are currently trading on a forward P/E ratio of around 16.
With such a strong trend in place and a valuation that appears quite reasonable, I would not be surprised if the share price continues to climb from here.
