The Crowded Momentum Trades May Be Over: Time to Buy Quality

You knew it was coming. When all the market gains were in a small group of crowded momentum stocks, you know that a day of reckoning for not only those stocks, but the market as a whole, was near. The question is, was Thursday’s sell-off just another up and down move in the sideways trend that started last November, or is it a signal for a far deeper plunge?

A new report from the very bright Savita Subramanian and her staff at Merrill Lynch points out that the large outperformance in July of the high-momentum growth stocks pushed the growth-to-value outperformance gap to 6.5% so far this year, the widest gap for this point in the year since the tech meltdown in 2000.

The bottom line is the momentum run may be over, and it is time to take profits and rotate to quality stocks. We screened the Merrill Lynch holdings in the Consistency and Predictability stocks list, and found four that could make great additions now. All are rated Buy at Merrill Lynch.


This stock has had an outstanding summer so far, up a sizzling 6.6%. Nike Inc. (NYSE: NKE) is a worldwide athletic giant that makes the list as top consumer discretionary name. It posted very strong fiscal fourth-quarter earnings when it reported in June. The company also has outstanding potential upside from a turnaround in its China business, improvements in gross margins and continued innovation-driven market share gains in both basketball and running footwear. With one of the most recognizable brands in the world, long-term investors may do very well adding shares here despite the big move up in the stock this year.

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Nike is benefiting from consumer preferences for “athleisure.” With the company’s extensive product line and recognizable worldwide branding, the stock continues to roll year-after-year.

Nike investors are paid a 1% dividend by the sporting apparel giant. The Merrill Lynch price target for the stock is $120, and the Thomson/First Call consensus price target is $117.30. Nike closed at $112.30 Thursday.

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