Combining Value and Momentum

by John Bajkowski

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Kevin Truitt illustrates how investors can benefit by combining traditional value and price momentum filters in his July 2013 AAII Journal article “Investing’s Odd Couple: Value and Momentum.” Research cited by Truitt highlights fundamental and technical factors that can be combined to help avoid both value traps and overvalued momentum stocks. It is possible to combine growth and value approaches with good track records into a combined approach with high expected return, but even lower expected volatility. Growth and value approaches tend to shine in different market environments, providing diversification benefits.

This issue’s First Cut applies the key factors highlighted in the article using AAII’s stock screening and fundamental database, Stock Investor Pro.

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John Bajkowski is president of AAII.
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The starting universe of 4,953 stocks consisted of exchange-listed companies. The First Cut first looked for companies with price-earnings ratios (price divided by trailing 12-month earnings per share) lower than the median industry ratio in which the company is classified. This type of relative comparison adjusts automatically to industry prospects and overall market conditions. The First Cut then filtered for companies with a PEG ratio (price-earnings ratio divided by five-year historical growth rate) to be either below the industry median or below 1.0. The screen’s final fundamental test required that the ratio of enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization) be 10 or smaller. Enterprise value is calculated by adding market capitalization, preferred stock and total debt, and reducing this sum by the amount of cash held by the firm. The enterprise value to EBITDA ratio relates a firm’s takeover cost to its earnings potential. The lower the ratio, the more attractive the firm. A total of 362 exchange-listed stocks passed all of the value filters.

Stock Investor Pro does not have moving averages, so the First Cut employed two of the three primary technical filters identified in Truitt's article. The passing companies have relative strength percentage ranks that highlight improving recent price performance. The First Cut required the four-week relative strength rank to be greater than the 13-week rank, which was greater than the 26-week rank, which in turn was greater than the 52-week relative price strength rank. The final filter required that a stock’s current price be within 25% of the 52-week high (price as a percent of 52-week high greater than 75%). A total of 161 exchange-listed stocks passed the price momentum filters.

Only 13 exchange-listed stocks passed both the value and momentum filters and they made the First Cut. The table ranks these stocks by how close they are trading to their 52-week high. Mixing growth and momentum strategies offers investors the potential for higher risk-adjusted returns. The combination helps to avoid “falling knives,” undervalued stocks without catalysts or even high-flying stocks unsupported by their fundamentals.


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Firms With a Combination of Value and Momentum

Company (Ticker) P/E Ratio PEG Ratio Enter-prise
Value to
Price as
% of
OceanFirst Financial (OCFC) 13.3 17.4 0.2 1.2 4.9 56 34 96 14.28 S&Ls/Savings Banks
PrimeEnergy Corp. (PNRG) 6.9 13.7 0.4 1.1 4.6 81 69 96 33.25 Oil & Gas Operations
Rick's Cabaret Int'l, Inc (RICK) 10.3 22.6 1.0 1.6 7.8 71 44 96 8.77 Restaurants
Hawaiian Telcom Hold Co. (HCOM) 2.4 14.6 0.2 1.1 5.3 84 77 95 25.40 Communications Services
Magic Software Enterprises (MGIC) 12.2 29.1 0.4 1.5 10.0 72 28 90 5.36 Software & Programming
China Cord Blood (CO) 10.2 16.9 0.2 1.6 3.1 69 32 89 2.86 Healthcare Facilities
Transportadora de Gas (TGS) 5.8 13.7 0.6 1.1 5.3 68 46 88 1.85 Oil & Gas Operations
Ocean Bio-Chem, Inc. (OBCI) 12.2 20.1 0.5 1.9 8.2 85 55 86 2.80 Personal & Household Products
Taylor Devices, Inc. (TAYD) 9.6 18.7 0.4 1.5 6.7 65 27 84 8.14 Misc. Capital Goods
Coinstar, Inc. (CSTR) 15.4 22.5 0.4 1.7 5.5 71 29 81 58.05 Recreational Activities
Questcor Pharmaceuticals (QCOR) 14.3 20.0 0.3 1.2 9.0 93 34 78 46.14 Biotechnology & Drugs
Cato Corp. (CATO) 12.1 17.6 0.8 0.8 5.8 70 26 77 25.01 Retail (Apparel)
Emerson Radio Corp. (MSN) 4.7 11.3 0.2 0.4 2.4 79 25 77 1.68 Audio & Video Equipment
Source: AAII's Stock Investor Pro, Thomson Reuters, and I/B/E/S. Data as of 6/14/2013.

    Field: Operator: Factor: Compare to:  
    Exchange Not Equal   Over the counter  
And   PE <   Industry PE  
And ( PE to EPS growth 5 years <   Industry PE to EPS growth 5 years  
Or   PE to EPS growth 5 years <   1 )
And   FC EV to EBITDA <   10  
And   % Rank-Rel Strength 4 week >   % Rank-Rel Strength 13 week  
And   % Rank-Rel Strength 13 week >   % Rank-Rel Strength 26 week  
And   % Rank-Rel Strength 26 week >   % Rank-Rel Strength 52 week  
And   AndPrice as % of 52 Week High >=   75  
Custom Fields Used in Screen:
    FC EV to EBITDA: IIF([FC Enterprise Value]>0, IIF([FC EBITDA]>0,[FC Enterprise Value]/[FC EBITDA], null), null)  
    FC Enterprise Value: [Market Cap Q1] + [Long-term debt Q1] + [Preferred stock Q1] + [Minority Interest Q1] + [Short-term debt Q1] - [Cash Q1]  
    FC EBITDA: [Pre-tax income 12m] + IIF(IsFieldNull([Interest expense 12m])=0,0,[Interest expense 12m]) + IIF(IsFieldNull([Depreciation 12M])=0,0,[Depreciation 12M])  
John Bajkowski is president of AAII.


Buzz Vanderschoot from CA posted about 1 year ago:

At one point weren't the actual SIP statements for the screen included with the online version of the article? When trying to duplicate a screen from its literal description, slight variations in interpretation can result in big differences in the final screen statement. It would help enormously if we could see the screen as the actual statements in the screen editor.

Jean from posted about 1 year ago:

The Stock Investor Pro criteria has been added to the end of this article. -Jean, AAII

John Corsi from MD posted about 1 year ago:

Did an exact duplicate of the screen and came up with 13 entirely different companies. There was not a single match. My data was as of July 5th while the article used June 14th data. If there is that kind of shift in just 3 weeks, this can't be a very reliable screen. Comments?

John Bajkowski from IL posted about 1 year ago:

The market sentiment shifted rather dramatically over the last month. This First Cut makes use of short-term price momentum and will likely have more significant changes n passing companies than other screens.

Cliff Jones from NC posted about 1 year ago:

Hi John,
Two very interesting articles here. Will this screen be added to the other screens, or will it just be available through Investor Pro? I would somehow like to see a history. Thanks!--C.J.

Kevin Smith from AR posted about 1 year ago:

Can statistics be provided on 3, 5 and 10 year historical returns using the approach, along with volatility? I like the screen, but would like to compare results to some of the tried & true screens I already use.

Thanks, KS

Charles Rotblut from IL posted about 1 year ago:

Hi Kevin,

This screen has not been backtested, so the data you seek is not available.


Kendall Carder from FL posted about 1 year ago:

Will the First Cut value and momentum stocks go into your shadow portfolio? Is there a surrogate First Cut portfolio that gets updated?


John Wiley from AZ posted about 1 year ago:

As an old FORTRAN programmer I'm not familiar with the IIF Boolean. I used IF the old days. Is there someplace in SIPro where these operators are listed? Also,is there a ranking for the custom fields? That is, don't they have to appear at the start of the program you have written above? Finally, do we just copy your language into the operator column and hit "run".

Jean Henrich from AAII posted about 1 year ago:

John Wiley -
Use the Custom Field Editor in SI Pro to create the three custom fields shown here. Copy the custom field name in the Name box and copy the line of "code" into the Expression box. Once you've created and saved the custom fields, use the Screen Editor to build the screen, plugging in the custom fields where shown. You'll choose the operators you need in the Screen Editor from a drop-down list when you click on the operator field.

GG from NY posted 9 months ago:

John Wiley- Sometime around 2008 SIPRO changed the way "zero" values are handled. The change was to NA or NULL. I.M.O. a terrible change for writing code. The change can cause problems with custom fields unless cumbersome allowances are made. My original custom fields were essentially invalidated. I canceled my SSI-PRO subscription. IsFieldNull and In-Line If (IIF). See May 2008 Stock Investor News.

BP from California posted 6 months ago:

This looks like a great screen. I just checked the charts on every stock on that screen and all but 3-4 were up 20%, 30%, up to 150%, from June 14 when the article was written and today, 24 feb 2014. Definitely worth using.

DJ from WA posted 5 months ago:

Can someone explain why momentum is the right filter to use? My impression was that you wanted to buy stocks when they are beaten down not when they are rising.

Vaidy Bala from AB posted 15 days ago:

I understand this is valid only for short term investment. May be a couple of weeks to months! I have not used nor tested this screen.

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