'Buy high, sell higher': 18 stock ideas; 4 key selection criteria for momentum investing 

Muthoot Finance, Bajaj Finance, State Bank of India, One 97 Communications Ltd (Paytm), Polycab India, and Eicher Motors are among 18 stock ideas from the top 200 listed companies, identified by ICICI Securities from a momentum investing perspective. Other names include SAIL, HPCL, TVS Motor, Mahindra & Mahindra, UltraTech Cement, and NMDC. 

Momentum investing, ICICI Securities explained, is based on the principle that stocks which have outperformed over the past six to twelve months and are approaching their 52-week highs, often driven by earnings upgrades, are likely to continue their positive trend over the next one to twelve months.

ICICI Securities said its back tests for 2022, 2023, and 2024, excluding Covid-related volatility of 2020–21, indicated that portfolios of stocks exhibiting four key momentum criteria consistently outperformed over a one-year period. 

These criteria include recent outperformance over six to twelve months, earnings upgrades or stability, and low fundamental risk by avoiding stocks with SELL or REDUCE ratings from sector analysts. A fourth consideration, the brokerage noted, is valuation discipline, with a peak PEG ratio of around 2 or a peak ‘market implied long-term growth value’ of roughly 90%, which helps avoid stocks driven by overreaction or market euphoria and allows underreaction to positive news to play out.

"Bulk of the stocks in current portfolio (of stocks) which exhibit the aforementioned criteria are from auto, discretionary consumption, industrials, commodities and financials," ICICI Securities said.

It highlighted that the success of a “buy high, sell higher” strategy stems from market underreaction to positive surprises. Behavioural biases such as “anchor and adjust” and loss aversion—particularly the fear of buying too high after a strong run—are amplified as a stock approaches its 52-week or all-time high driven by earnings upgrades. The brokerage explained that systematic undervaluation relative to the evolving rate of change is central to momentum investing. Investors tend to react slowly to incremental positive information, making outperforming stocks systematically undervalued at their highs.

In ICICI Securities’ back-tested momentum portfolios, most underperforming stocks were those where negative earnings surprises began to emerge. The brokerage said monitoring earnings revisions is therefore critical. 

Avoiding overreaction allows the fundamental underpinnings of momentum investing to materialise, which can be achieved by capping PEG ratios or limiting speculative value using proprietary metrics such as market-implied long-term growth. Maintaining low fundamental risk by steering clear of stocks with SELL or REDUCE ratings further mitigates excessive speculative valuation and ensures a disciplined approach to momentum investing.