Investing’s Odd Couple: Value and Momentum
For value investors, the sweet spot in investing is being able to buy an undervalued stock right before its value is recognized by the market and just before its stock price begins to take off.
But how can a value investor tell when a stock is in the sweet spot? The answer, according to Brian Nelson, president of investment research company Valuentum Securities, is to identify stocks with good value that are just starting to exhibit good technical/momentum characteristics.
Doing so helps an investor avoid:
- value traps: stocks whose prices continue to fall—so-called “falling knives”—or stocks whose value will never be recognized by the market,
- underperformance due to the opportunity cost associated with holding a stock with great potential, but whose value takes an inordinate amount of time to be recognized by the market and
- speculative momentum or irrational high-yielding stocks whose technicals are unsupported by their fundamental valuation (“greater fool” stocks).
Many investors often base their investment decision on whether a stock is undervalued or overvalued or whether it has excellent competitive advantages or other qualitative measures. Nelson believes this a great start but it’s an incomplete assessment, as stocks can stay undervalued or overvalued for decades (and some stocks may never converge to an