As simplistic as the methodology is, momentum investing can generate market-beating returns. However, momentum anomalies tend to collapse when structural breaks occur in the economy. As such, frequent revision of your momentum positions is required.
I have reason to believe that the stock market has reached a pivotal point. Although the U.S. Consumer Price Index settled above estimates at 3.5% for March, the year-over-year trend in inflation is down. Moreover, high-yield corporate bonds in the U.S. have slid by about 1% in the past quarter, suggesting that credit risk is rising. In essence, the economic cycle has entered a new stage, meaning momentum stocks face structural change.
Structural changes in the economy will likely lead to adjustments in the stock market. For that reason, I’ve turned bearish on numerous momentum stocks.
With the aforementioned considered, I would sell three momentum stocks ASAP.
Federal Loan Mortgage Corporation (FMCC)
The Federal Loan Mortgage Corporation (OTCMKTS:FMCC), aka Freddie Mac, is a state-sponsored enterprise that operates in the secondary mortgage market. The organization buys, secures, and sells residential mortgages. Although a state-owned enterprise may seem bulletproof, FMCC stock’s near 2.5x year-over-year surge proves that FMCC stock is highly volatile.
Mortgage rates are still high. For instance, the 30-year national average is at 7.03%. However, a U.S. interest rate pivot is looming, which could lead to lower mortgage valuations due to prepayment risk. Furthermore, potential economic softening means delinquency risk might kick in soon, adding additional pressure to Freddie Mac from an insurance vantage point.
Freddie Mac’s fourth-quarter earnings results were publically disseminated in February. The entity achieved $2.69 billion in net income, a 65% year-over-year increase. Even though organic variables such as higher mortgage rates played a role, much of Freddie Mac’s success stemmed from a credit reserve release. I think credit risk will spike in late 2024, reversing Freddie Mac’s credit reserve benefits and contemporaneously adding secondary headwinds to its mortgage portfolio.
FMCC stock trades above its 10-, 50-, 100-, and 200-day moving averages. Thus, the question becomes: Is FMCC stock overpriced? I, for one, think so!
Harmony Gold Mining Company Limited (HMY)
Harmony Gold (NYSE:HMY) is a South African gold mining company whose stock has doubled in the past year. The firm mines the Mponeng mine, the world’s deepest gold mine, and operates adjacent assets.
Although Harmony Gold possesses a substantial operational infrastructure, rising gold prices have contributed to much of HMY stock’s recent outperformance. I believe technical asset pricing will lead to gold prices flatlining in the coming months, concurrently denting Harmony Gold’s systematic tailwinds.
Sure, Harmony Gold released a robust first-half earnings report in February, delivering $1.68 billion in revenue, a 25.4% year-over-year increase. However, apart from uncertain gold prices, headwinds are en route. For example, Harmony Gold faces a highly uncertain South African national election in May, adding to HMY stock’s country risk premium. Additionally, Harmony Gold’s Australian operations are challenged by an ongoing labor shortage, meaning the firm’s cost base will likely remain elevated.
I’m going to be honest: Harmony Gold’s net income margin of 15.5% is impressive. Nevertheless, inventory pricing headwinds paired with fundamental cost challenges may lead to investors cashing out on their gains, especially as HMY stock’s relative strength index (RSI) is above 70.
Devon Energy (DVN)
Despite the rise in renewable energy uptake, fossil fuels remain an essential part of our global energy mix. However, that does not diminish the fact that non-renewable energy stocks such as Devon Energy (NYSE:DVN) are highly cyclical.
DVN stock’s RSI is placed at about 75. Moreover, DVN stock trades above its 10-, 50-, 100-, and 200-day moving averages. As such, technical pricing points suggest DVN stock is overpriced.
Devon Energy is grappling with significant fundamental issues. For instance, the company’s upstream sales in the fourth quarter of last year dropped by 12.8% year-over-year to approximately $2.74 billion. Similarly, Devon Energy’s midstream sales also declined by 10.6% year-over-year to about $1.08 billion. These figures highlight the underlying challenges the company is currently facing.
Some might say the figures above will soon reverse. However, the uncertain economic and pricing environment makes production ramp-ups unlikely, placing Devon Energy in a tight spot. Therefore, DVN stock’s aforementioned technical pricing points could be problematic as they contradict Devon Energy’s fundamentals. Besides, let’s not overlook the fact that DVN stock’s price-to-book ratio of 2.82x is way out of line!
On the date of publication, Steve Booyens did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.