Value Momentum Superbabies are tiny stocks that look deceivingly light-weight but which actually carry a mammoth-sized wallop. Do not – I repeat – DO NOT underestimate the power of small value momentum stocks. A great SSRN white paper about the value momentum strategy is available here.
What do I love about the value momentum strategy?
- First, I believe in value. Under-valued stocks have potential to increase in value when market favor shines their way.
- Second, value is to momentum as what the sun is to Superman and what spinach is to Popeye. A stock which goes up fast has high momentum. But how do you know whether it will stay soaring or not? The answer is value. Prices can go up but as long as the stock is still a blazing deal, it can go up a whole lot further and stay there.
- Third, value momentum works best with small stocks. This keeps the big boys and their greedy little fingers out of our strategy.
Below is a historical backtest since 1999 until today that analyzes the Value, Momentum and Value Momentum strategy. I added in a few requirements so that this represents stocks you can actually trade. For instance, there is a minimum share price of $3 and at least $100,000 worth of stock needs to trade daily in order to be considered.
What a beautiful marriage of 2 strategies. And I did this in the simplest possible way. Believe me when I say there are various tweaks and customization’s you can make to really super-charge this type of system. I will write more about that in a future blog post.
For those of you who have an active Portfolio123 account, use the Value Momentum screener link provided. Go ahead and save it as your own and make any change you see fit. For those of you who do not have an account, either sign-up using the link above or else use the basic principles in the section below in whatever screener you use.
Create Your Own Simple Value Momentum Strategy
Before you start screening through endless lists of stocks you should decide what your base universe of stocks will be. I encourage you to only screen through small stocks with $500 million in market-cap or less. I don’t encourage trading Over The Counter tickers. I add in liquidity requirements mentioned earlier – namely minimum $3 per share and an average of $100,000 of share value traded daily.
If you want a very basic way to create a uber-simple valmo system is to add the following two rules:
- Trailing price-to-earnings (PE) ratio less than 15
- Trailing 3 month price return at least 10% higher than the market average
While you will probably need to roll up your sleeves and really examine these stocks carefully, it has backtested with an average annual return of around 25%. That is nothing to scoff at for a simple two rule stock-picking system.