How It Pays to Play the Momentum Stocks

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How It Pays to Play the Momentum Stocks

I have been following social media company Twitter, Inc. (NYSE/TWTR) since the stock debuted to heightened fanfare on November 7, 2013. The hyped-up momentum play spiked to just over $74.00 on superlative enthusiasm and pure insanity, prior to its subsequent sell-off.

I must admit that Twitter intrigued me as a trade but only if the stock price broke below $30.00, as I have suggested in these pages before. Well, on May 7, Twitter declined to a low of $29.51.

For those of you who picked up some shares at this low, it was the correct decision; Twitter surged 25% on Wednesday morning on news that the company had easily beat on revenues and earnings estimates. Revenue growth was impressive at 124%, as the company was able to monetize its user base just as Facebook, Inc. (NASDAQ/FB) has done.

Chart courtesy of www.StockCharts.com

Twitter grew its user base at a faster pace than the stock market expected and better yet, it was able to make advertising money from these efforts, which is what you want from social media stocks.

With these results, we are seeing numerous rating and price target upgrades for Twitter from Wall Street, which has been anxious to do something in an otherwise boring stock market.

As a trader in the stock market, I would be looking to buy Twitter on downside weakness—after all of this hoopla has faded. At this time, the valuation continues to be obscene.

The reality is that what happened with Twitter indicates the strong upside potential in Internet stocks that can be achieved for aggressive traders in the stock market. You may make steady returns on companies like General Electric Company (NYSE/GE) and Wal-Mart Stores Inc. (NYSE/WMT), but these returns would be nowhere close to the potential gains you could achieve with higher-risk growth stocks.

For momentum traders, my favorites across the spectrum of Internet stocks include The Priceline Group Inc. (NASDAQ/PCLN), Facebook, Google Inc. (NASDAQ/GOOG), Netflix, Inc. (NASDAQ/NFLX), and Amazon.com, Inc. (NASDAQ/AMZN).

These five stocks are tops in their respective areas in the stock market and could be a buying opportunity on stock market weakness.

For instance, I traded Facebook after the stock fell to the $18.00 level and dumped the position at around $25.00 for a nice quick gain. Yet I wish I was more patient, as Facebook is now trading at nearly $75.00. There goes my Porsche Carrera . . .  But other trading opportunities in the stock market always appear, so maybe one day . . .

The key to successful trading is to focus on momentum and look at opportunities to buy after weakness in the price. How long you decide to hold a position depends on your risk tolerance and availability of capital—know your limits and work within them. You may not be able to make a fortune on one trade (as I learned with Facebook), but more opportunities will come along.

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