Author Topic: Value investing and momentum  (Read 3658 times)

ValueSlant

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Value investing and momentum
« on: July 22, 2011, 08:52:38 AM »
I have been thinking about how momentum might be incorporated into a value investing framework. Here is one thought on it in light of the crazy action in JVA in the past few months:

http://valueslant.com/2011/07/22/value-momentumthe-case-of-coffee-holding-co-jva/

Basic idea would be to look for stocks that are in hot sectors but are still undervalued from fundamental perspective and could use momentum as a value unlocking catalyst when the momentum investors "find" the stock. Would be interested in hearing about if anyone has tried this as a defined strategy or if you have any current stock ideas along these lines.


link01

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Re: Value investing and momentum
« Reply #1 on: July 22, 2011, 10:16:26 AM »
you might want to visit the 'mechanical investing' board at motley fool. mostly they are a bunch of statistically-inclined geeks, but there's a handful of bi-polar value guys there too who have a quant bent. especially look for posts by mugofitch. he's one of the most prolific posters there as well at the fool berkshire board.

Hester

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Re: Value investing and momentum
« Reply #2 on: July 22, 2011, 10:47:50 AM »
It would be a nearly impossible strategy to carry out in my opinion. Value and momentum are often the opposite. Occasionally one can find a stock with price momentum that is also undervalued or is selling at low multiples, but very rarely. I've owned one for the last year, SPA, but it would be nearly impossible to fill a portfolio with these names. It's hard enough finding 10 or 20 undervalued stocks, much less 10 or 20 undervalued stocks with momentum.

By the very definition, a "hot" stock or a stock in a hot sector has a lot of buying and is popular among investors. A stock with those characteristics, for it to be undervalued would be an extremely rare event. Value investors need to look for uneconomical or forced or a copious amount of sellers, not buyers.

I think one would be forced, whether conciously or sub-conciously, to buy less and less inexpensive stocks in the pursuit of momentum, and that would have disastrous effects.

The problem with combining strategies, even global macro and TA with value investing, is that each strategy is so hard to implement on it's own,combining them would be very difficult.

My $.02


NormR

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Re: Value investing and momentum
« Reply #3 on: July 22, 2011, 11:06:39 AM »
One could just hold, say, 10 value stocks and 10 momentum stocks.

ValueSlant

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Re: Value investing and momentum
« Reply #4 on: July 22, 2011, 11:34:16 AM »
Hester- I think I am proposing something different than trying to buy stocks with price momentum that are still cheap by value standards. I agree that would seem hard to implement, although I have seen some investors who try to do something along those lines.

I was proposing buying stocks that have not exhibited price momentum and are cheap and safe from a value perspective but are in a sector where a lot of the other names do have price momentum (and are probably richly valued). Theory being that you basically have a free option that momentum investors grab a hold of it as the next "hot thing", and if not you are just left with a good value investment.

This probably wouldn't be a stand alone strategy but just a point to consider in the course of research if you are of the value investing persuasion that likes to look for catalysts. I also don't know how common opportunities like these are as I have not consciously looked for them in the past.

Thanks for the perspective on combining strategies, I know many feel that way.


Hester

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Re: Value investing and momentum
« Reply #5 on: July 22, 2011, 11:44:17 AM »
Oh Ok, yeah I miss understood you and should of read your blog post more carefully.

I think that's a better strategy, although the only problem is at any given time there is only a few hot sectors, and therefore the investor would be concentrated in those industries. But as you said if it's just a side part of an overall strategy it should be fine. It will still be very tough to find cheap stocks in hot sectors though.

Does anyone know of an example of a cheap stock in a hot sector currently? Cloud computing is hot but the economics are worse than people think, and I don't know of any cheap stocks. Coffee is hot but no more cheap ones that I can find. Social networking too but nothing selling below a gazillion times revenue.

finetrader

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Re: Value investing and momentum
« Reply #6 on: July 22, 2011, 12:19:36 PM »
When buying a cheap stock that has go down, I try to use technical analysis to find a good entry point.

A rare good argument I have heard from technical analysts is that even if you are a fundamental guy, before buying a fallen knife, wait for a graphic that is showing some king of bottoming.
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Liberty

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Re: Value investing and momentum
« Reply #7 on: July 22, 2011, 12:37:45 PM »
When buying a cheap stock that has go down, I try to use technical analysis to find a good entry point.

A rare good argument I have heard from technical analysts is that even if you are a fundamental guy, before buying a fallen knife, wait for a graphic that is showing some king of bottoming.

Out of curiosity, how can you predict that it is the bottom or near it just by looking at a graph of past trades? If that actually worked, wouldn't technical analysts be the best-performing investors?
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finetrader

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Re: Value investing and momentum
« Reply #8 on: July 22, 2011, 12:55:26 PM »
look, I'm not a technical guy, and i think that short term anything can happen. All I'm doing, is that I'm not buying a stock that the chart is pointing downhill even if the stock price indicate a bargain. I will wait for some horizontal points.
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Rabbitisrich

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Re: Value investing and momentum
« Reply #9 on: July 22, 2011, 04:06:54 PM »


I was proposing buying stocks that have not exhibited price momentum and are cheap and safe from a value perspective but are in a sector where a lot of the other names do have price momentum (and are probably richly valued). Theory being that you basically have a free option that momentum investors grab a hold of it as the next "hot thing", and if not you are just left with a good value investment.

This probably wouldn't be a stand alone strategy but just a point to consider in the course of research if you are of the value investing persuasion that likes to look for catalysts. I also don't know how common opportunities like these are as I have not consciously looked for them in the past.



That method still faces the problem of all technical analysis, which is that there are multiple pathways to every price action and no method to determine the relevant pathway. The price action is an indicator of a catalyst(s) but is not in itself a catalyst.

In this age of Carson Blocks and Whitney Tilsons (referring to their promotion, not integrity or quality of research), wouldn't it be better to simply purchase the cheapest stock and then broadcast your thesis?