Momentum investing is simple in theory…
You buy what is going up. It is based on the market anomaly that winners tend to keep winning… until they don’t.
Over the last five years, US markets have taught you that there are two distinct types of momentum…
Persistent momentum (driven by earnings and structural shifts) and junk momentum (driven by hype and liquidity).
This article analyses the top momentum shares of the last half-decade and provides a strategy for you to filter out the speculative traps that destroy portfolios.
The Quality Momentum Hall of Fame (2020–2025)
For you, true momentum shouldn’t be about a share doubling in a week.
It’s about finding a company trending higher for 3-12 months because the business is fundamentally changing. These are the shares that defined the strategy over the last five years.
1. The AI & Tech Titans
The most obvious momentum trade of the decade has been the “pick and shovel” plays for artificial intelligence.
- NVIDIA (NVDA): the undisputed king. From 2023 through 2025, you rarely saw it absent from momentum screens. Unlike speculative tech, NVDA backed its price run with triple-digit earnings growth.
- Broadcom (AVGO): while less volatile than Nvidia, Broadcom has been a smoother momentum operator for you to hold, steadily grinding higher due to its dominance in custom silicon and networking.
- Meta Platforms (META): a unique case of turnaround momentum. After you watched it crash in 2022, Meta’s “year of efficiency” in 2023 sparked one of the most violent and sustained upward repricings in modern history.
2. The Real Economy Silent Winners
While retail investors chased AI, institutional momentum funds loaded up on boring, highly profitable industrial companies that capitalised on US infrastructure and housing trends.
- Builders FirstSource (BLDR): this supplier of building materials has frequently outperformed big tech over 6-month intervals. By dominating the structural shift toward value-added construction components, BLDR became a compounding machine.
- Comfort Systems USA (FIX): an HVAC and mechanical systems installer. It quietly returned over 1,000% in five years. Why? Because every new data centre and factory needs massive cooling systems. It is the definition of “boring is beautiful”.
- Deckers Outdoor (DECK): the parent company of HOKA and UGG. While you watched Nike struggle, Deckers captured the consumer footwear trend, proving that momentum exists in retail if you pick the right product.
3. The GLP-1 Duopoly
In 2023 and 2024, the momentum trade shifted heavily into healthcare, specifically weight-loss drugs.
- Eli Lilly (LLY) & Novo Nordisk (NVO): these two companies became the “tech stocks of healthcare”. Their momentum was driven by the unprecedented demand for Mounjaro and Ozempic, decoupling them from the rest of the struggling biotech sector.
But then, Ozempic and Wegovy started falling out of fashion and Eli Lilly was the one to go for. As sales collapsed, so did Novo’s margins – the perfect time to start exiting.
The Junk Momentum Graveyard (2024–2025 Warnings)
The danger of momentum investing is getting caught in a “rubbish rally”. These are shares that skyrocket due to short squeezes or retail hype but lack the fundamentals to sustain the price. When the music stops, these shares don’t just correct – they collapse on you.
1. The 2025 Meme Revival Traps
In 2025, you saw a brief, violent echo of the 2021 meme frenzy. If you bought these on price strength alone, you were punished severely.
- Krispy Kreme (DNUT), GoPro (GPRO), and Opendoor (OPEN): all three saw massive, vertical rallies in 2025 driven by social media hype and short covering. Because the underlying businesses remained challenged (high debt, lack of profits), the rallies imploded as quickly as they began.
2. The Unprofitable Tech Basket
Goldman Sachs tracks a basket of ‘non-profitable tech’ companies. In 2024 and 2025, this basket famously diverged from the S&P 500. While profitable tech (Nvidia, Microsoft) soared, unprofitable tech fell approximately 20%. This is the clearest signal to you that the market has stopped rewarding growth without profits.
3. Biotech Cash Burners
The SPDR S&P Biotech ETF (XBI) is often a trap for momentum algorithms. You might see small biotechs double on a single clinical trial result, triggering momentum buy signals, only to crash 60% the next month when they announce a secondary share offering to raise cash.
How You Can Filter for Quality Momentum
To protect yourself, you must pair a momentum screen (price strength) with a quality screen (business health). Use this 4-step checklist to filter out the junk.
Step 1: The Balance Sheet Check (The Survival Filter)
Speculative momentum shares often have high debt loads that become toxic when the share price drops.
- Metric: debt-to-equity ratio < 1.0 (or < 2.0 for capital-intensive utilities/industrials).
- Metric: interest coverage ratio > 5x.
- Why: if a company is paying more in interest than it earns in operating profit, your investment is a ticking time bomb (e.g., Opendoor).
Step 2: The Earnings Test (The Reality Filter)
Price can lie; cash flow rarely does. Junk momentum relies on “price-to-sales” valuation. Quality momentum relies on “price-to-earnings”.
- Rule: net income must be positive. (No ‘adjusted EBITDA’ excuses).
- Rule: EPS growth > 0% over the last 2 quarters.
- Why: you want companies that are funding their own growth (like Broadcom), not selling shares to survive (like many small biotechs).
Step 3: The Rule of 40 (For High-Growth Tech)
For software companies that reinvest heavily, simple earnings might look low. In this case, use the SaaS ‘rule of 40’.
- Formula: revenue growth % + free cash flow margin % > 40.
- Example: if a company grows revenue at 30% but has a 15% FCF margin (Total = 45), it is quality momentum. If it grows 50% but burns -30% margins (Total = 20), it is junk momentum.
Step 4: The Smoothness Factor (The Sleep Well Filter)
You want momentum that looks like an escalator, not a roller coaster.
- Metric: look for low volatility within the uptrend.
- Visual Check: a share that grinds up 2% every week for a year is superior to one that goes up 50% in a week and then does nothing for six months. The former implies institutional accumulation while the latter implies retail punting.
Summary Checklist
| Metric | Quality Momentum Target | Junk Momentum Warning Sign |
|---|---|---|
| Trend Duration | 6-12 months | 1-4 weeks |
| Earnings (EPS) | positive & growing | negative |
| Debt | low / manageable | high / distressed |
| Analyst Revisions | estimates going up | estimates flat or down |
| Example Share | Comfort Systems (FIX) | GoPro (GPRO) |
Frequently Asked Questions (FAQ)
1. How often should I rebalance a momentum portfolio?
Momentum strategies typically work best with monthly or quarterly rebalancing.
- Too often (weekly): you will erode your returns through dealing costs and tax drag (“churning”).
- Too rarely (annually): you risk holding onto winners that have already turned into losers. Momentum trends often shift every 6-9 months.
2. Does this strategy work in bear markets?
Traditional momentum struggles in whipsaw markets (sideways chop). However, in a prolonged bear market, a rigorous momentum strategy will automatically rotate you out of falling tech shares and into ‘defensive momentum’ sectors like utilities, consumer staples, or even energy (as seen in 2022).
One of our favourite plays when tech looks like it’s cooling off is actually to buy McDonalds!
If nothing is going up, many momentum strategies move you to cash.
3. What is the best timeframe to measure momentum?
Academic research (Jegadeesh and Titman) famously supports the 12 minus 1 rule.
- Look at: total return over the last 12 months.
- Exclude: the most recent month.
- Why? shares often experience a short-term reversal in the very immediate term (profit taking), but the long-term trend (1 year) tends to persist.
4. Should I use stop-losses?
Yes. Momentum investing is a trend following strategy. When the trend breaks, the reason for you owning the share is gone.
- Common Method: a trailing stop loss (e.g., 10% to 15% below the high) or selling if the share closes below its 200-day moving average. This prevents a correction from turning into a crash.
Important Note: Frameworks, Not Financial Advice
The strategies, formulas (such as the “rule of 40”), and checklists outlined above are intended as mental frameworks to help structure your thinking, not rigid instructions. You have a unique risk tolerance, time horizon, and financial situation.
- Adaptability is Key: as a 25-year-old investor, you might tolerate the volatility of a pure momentum strategy, while if you are a retiree, you might need to prioritise capital preservation over aggressive growth.
- No Silver Bullets: no screening method guarantees success or eliminates risk. Even ‘quality momentum’ shares can suffer significant drawdowns during systemic market shocks.
These tools are suggestions to refine your process, not deadset rules because you might have a different consideration of what ‘junk’ or ‘quality’ is based on your risk tolerance for instance.
The Discipline of Strength
The lesson from the last five years of market action is obvious…
Momentum is a powerful force, but it is agnostic. It does not care if a company is a cutting-edge AI chipmaker or a boring HVAC installer. It simply follows strength.
But blind trend-following is a dangerous game.
By adding a fundamental quality filter – checking for profits, manageable debt, and smooth price action – you transform momentum from a speculative gamble into a disciplined investment strategy. Your goal is not just to find the next Nvidia, but to avoid becoming the bag holder for the next meme stock collapse.
Stay disciplined, trust the trend, but verify the business.
And you can add even more by reading more of our momentum articles like this one.