3 Momentum Trades Too Good Pass Up

Key Points

• Momentum investing revolves around the notion that companies that have gone up recently will continue to do so.
• Looking over the past 10 years, investing in a momentum-based ETF has outperformed the S&P 500.
• I'll outline three momentum companies that I feel have particularly strong characteristics. 

Momentum investing is based on the idea that stocks that have risen recently will tend to keep rising and that stocks that have fallen tend to keep falling. In 1993, researchers Narasimhan Jegadeesh and Sheridan Titman at UCLA brought the idea forward.

Momentum investing has held up over the past 10 years. Looking at the iShares MSCI USA Momentum Factor ETF BATS: MTUM, it's seen that the fund has outperformed the S&P 500 over that period. The fund has notched a cumulative total return of 251%, versus the 245% total return of the SPDR S&P 500 ETF Trust NYSEARCA: SPY.

Below I’ll point out three of my favorite companies that are currently considered momentum stocks.

Intuitive Surgical: Revolutionizing the Operating Table

Intuitive Surgical’s NASDAQ: ISRG shares have provided a total return of 66% over the past twelve months, beating out the S&P 500 by 30%. This company stands out due to the incredible products it has built. Its primary product is the da Vinci robot.

This is a remotely controlled robot that assists doctors in performing surgeries. Its main advantage is in reducing the human error involved in surgeries. It eliminates the risk of things like hand tremors in surgeons and can make smaller, more precise cuts than a human. This reduces the invasiveness of surgeries and allows patients to have shorter recovery times.

Even after being around for over 10 years, the company is still seeing very solid revenue growth, coming in at 14% last quarter. The company continues to become more and more profitable. It increased its gross margin by over 150 basis points from last year. Its operating margin rose by nearly 200 basis points. Its operating margin is higher than 91% of companies in the US healthcare sector. Its dominant market position created through its leading technology allows it to maintain and increase these margins.

The Role of Artificial Intelligence in Dell's Growth Strategy

Over the past twelve months, Dell’s NYSE: DELL shares have returned a total of 67%. Unlike Intel NASDAQ: INTC, Dell is one of the legacy U.S. tech companies that have been able to successfully navigate the changing landscape. The rise of new technology firms and the advent of artificial intelligence necessitated that these companies shift their business toward the AI and data center vector.

Dell has done exactly that. Dell was traditionally known as a personal computer (PC) company. Now, nearly half its business comes from its Infrastructure Solutions Group. Within this segment, it sells AI-optimized servers to data centers. The company has seen massive growth in the sales of these servers, up 80% in just one quarter. Sales of these servers last quarter topped their combined total sales in Dell’s fiscal 2024.

This rapid expansion is good to see, and the company still has a $3.8 billion backlog in AI server orders it is working to fulfill. Dell could start to look even better if its PC business picks up again. Growth in that business was 0% last quarter. But, it's possible growth could reignite as people and businesses need to replace aging devices and want PCs that can internally handle GenAI.

Eli Lilly: Dominating Pharmaceutical Growth

Eli Lilly NYSE: LLY is another healthcare stock with a very strong market position. It's the world's largest drug company, with a market cap over $250 billion higher than the next closest company. Its gross and operating margins rank in the top three among the 10 largest pharmaceutical companies in the US, Canada, and Europe.

The company’s stock has provided a total return of 66% over the past twelve months, and 295% over the past three years. It's done so largely off the back of its GLP-1 drugs for diabetes and weight loss. Mounjaro and Zepbound are leading the charge right now for Lilly. The drugs' sales increased 71% and 140% in just one quarter.

These drugs are driving growth, but Lilly has an edge over its GLP-1 rival, Novo Nordisk NYSE: NVO. It is less reliant on its GLP-1 drugs at this point. In the first six months of 2024, these drugs accounted for over 66% of Novo’s sales, compared to just 46% for Lilly. Additionally, Lilly is taking GLP-1 market share from Novo. Mounjaro and Zepbound appear to be significantly more effective in helping patients lose weight compared to Novo’s Ozempic and Wegovy.