Anthony Speciale Stock Market Analyst

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Why Institutions are Piling Into these Momentum Stocks

There’s an old saying that applies a lot of things in life: A trend in motion tends to stay in motion. This is very true even in the stock market, as one of the things that delivers excess returns is the momentum factor. I’m talking about how stocks that are moving up tend to keep moving up, at least for several months.

Momentum works best in shorter time frames of one to 12 months and along with the value effect is one of the long-lasting market anomalies that has consistently delivered excess returns.

Now, the school of thought in academia and in practice on Wall Street has all too often been that you have to pick one or the other. You can either be a value investor or a momentum investor, but you can’t be both.

Well, here’s the thing… You can be both! And there’s a lot of evidence to show that if you use both, they work in different timeframes and at different times (momentum generally works a year or less, and value, a year or more) and you tend to capture this massive outperformance.

But when you have 50% of your money in value stocks and 50% in momentum stocks, you still get there over the long run, as both have very high returns. But along the way, when value is doing well, momentum isn’t so hot. And when momentum is doing well, value isn’t so hot.

They tend to balance each other out and smooth the ride. You still get the higher returns, but you get a smoother journey along the way, which makes it much easier to stay in the game.

B. Riley Financial, Inc.

Anyway, there’s a stock I have loved for a long time that I want to tell you about today. B. Riley Financial, Inc. (RILY) is a fantastic company, and for my money, it’s one of the best research firms in all of Wall Street, despite the fact that it’s headquartered in Los Angeles, California.

They do primarily small-cap research, they have a value bent and they are really, really good at it. But it’s not just a brokerage firm. They also do asset management, accounting, loss mitigation, forensic accounting, valuation services and more. Basically, if it has to do with money, they’re involved in it, and business has been going gangbusters for them over the past couple of years.

Institutional investors have noticed, and they’re starting to pour money into the stock and making shares of RILY move smoothly up and to the right. This is exactly what we want to see in a momentum stock, with continual buying pressure coming into a stock and driving it continuously higher to massive profits.

Now, looking at RILY, there’s something else going on here… Constant insider buying. All of the executives, including the CEO, are buying stock seemingly every day, and it’s not small amounts.

These guys see the big picture and the environment in front of them, and they know that their company is worth a lot more than the market is currently valuing it at. So, they’re constantly buying stock, and institutions love to see that, so they follow along and jump in as well.

This is a financial stock that really looks more like a growth stock, as last quarter’s earnings were that good. One-year cash flow was up 50% year over year, and they doubled the dividend so that the stock now yields over 5%, making this partially an income play as well.

They also paid out a $3 per share special dividend, so they’re being very generous about returning cash to shareholders, and there’s the momentum factor that could give us enormous capital gains on top of that. That’s exactly the kind of stock I’d like to have in a momentum portfolio.

These types of financial results are going to continue to attract institutional cash flows for an extended period of time, so I think you can jump into shares of RILY, collect that nice 5% dividend yield and ride this stock up and to the right.

Encore Wire Corporation

Now, I want to give you one more name before I sign off. Encore Wire Corporation (WIRE) is a company we have been watching really closely, as institutions are piling into it and analyst estimates are being increased.

The company makes wires that are used for all types of electrical applications, indoor or outdoor. If it has to do with electricity getting from point A to point B via a wire, Encore makes that wire.

They’re going to be a massive beneficiary of the current boom in home building, and I think there’s going to be a lot of building thanks to a huge home shortage right now.

This company has some massive tailwinds behind them, institutions are piling in and you’re seeing that stock exhibit the type of smooth, up-and-to-the-right momentum that we love to see.