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July, 2016


An article in its May, 2016, issue, the AAII Journal ("Momentum's Role as a Driver of Stock Prices," by Charles Rotblut, CFA) indicates that over the long-term stocks selected for a combination of value, small- to mid-cap company size, and momentum have on average performed better than either the market as a whole or any one of those factors alone. In fact, for the longest historical record available, that of the Dow, when smaller company stocks were looked at both in terms of value and relative price strength, those that were lower in price to book value but in the upper 30% by price performance had annual returns of 19.8%.

With the benefit of The Motley Fool screener, one can develop a portfolio of candidate stocks having similar characteristics to those that have been so winning in the past. This hardly assures they will perform as well, yet suggests they at least have excellent prospects.

A small selection of potentially winning companies can be obtained using the following variables at The Motley Fool screener site:

  1. Customized market-cap equal to or less than $10 billion;

  2. 52-week price change 5% or greater;

  3. Three-month volume of average daily shares traded 200,000 or above;

  4. The Motley Fool CAPS rating 4 or 5 (five being highest);

  5. Current price $5 or higher;

  6. 13-week price change 3% or greater;

  7. Current dividend yield 0.1% or higher.

  8. Price to book value 0.1 to 1.50.

When I run this screen, I generally get around 20 stocks. After a stocks correction or bear market, the screen will perhaps provide more, whereas when it is significantly overvalued there are likely to be a lot fewer. I eliminate from the results limited partnerships (LPs) or American depositary receipts (ADRs). It seems to me that on average, LPs and ADRs add risk without increasing return substantially.

With the candidates that remain, I perform a few calculations. This set of steps is not at all the only way the selection need be finalized, just the one that seems to work best for me:

  1. Multiply 4 times the 13-week price change for each stock.

  2. Add to this its 52-week price change.

  3. Divide by 5.

  4. Add to the result the stock's annual dividend percentage.

  5. Invest in the ten stocks with the highest outcome from step iv.

At the table are the present top ten stocks (as of this writing, 7/10/16).

Small- to Mid-Cap Stocks with Value and Momentum
Company NameRecent
P/BK52-wk. Price
AIZAssurant, Inc.$86.43$5.35 Bill.2.30%1.1723.1%
BDNBrandywine Realty Trust$16.61$2.91 Bill.3.90%1.4921.2%
CHFCChemical Financial Corp.$37.28$1.43 Bill.2.80%1.3812.3%
GPTGramercy Property Trust$9.68$4.08 Bill.4.50%1.4832.8%
NWBINorthwest Bancshares, Inc.$14.81$1.51 Bill.4.10%1.2914.1%
ORIOld Republic International Corp.$19.34$5.07 Bill.3.90%1.2221.0%
RSReliance Steel & Aluminum Co.$80.18$5.80 Bill.2.00%1.4534.6%
SIRSelect Income REIT$26.65$2.38 Bill.7.50%1.1323.2%
SKYWSkyWest, Inc.$27.17$1.40 Bill.0.70%0.9189.7%
VERVEREIT, Inc.$10.30$9.32 Bill.5.30%1.1322.5%

Stocks picked in this way probably should be reconsidered more often than yearly, since momentum ceases to favorably affect a typical stock price in less than 12 months. For my purposes, the shortest interval before rebalancing one's portfolio is about a month, the longest around three months. Winning stocks will tend to remain in the portfolio longer, losers being sold off more quickly. Normally, though, stocks will not stay much more than 4 months. Both in terms of capital gains and dividends, such a rate of turnover suggests that, if they are an option, tax-deferred accounts are better for investments based on this method.

It is well to keep in mind that, though the approach is on average a winner, it is somewhat more volatile than strategies that are more strictly value oriented. Thus, there can be times, for instance in 2008 to early 2009, when it will temporarily under-perform both the market as a whole and a classically Ben Graham method. If there are extra reserves on hand, at such times they can be added into the mix while prices tend to be lower, boosting the value aspect of this method.

A review of the current top candidates shows that they have an average market-capitalization of $3.93 billion, an annual dividend of 3.70%, a price to book value of 1.26, and a 52-week price change of 29.45%. (By comparison, the average U.S. stock in the S&P 500 Index has a market-cap of roughly 36 billion, a dividend of 1.71%, a price to book value of 2.89, and a 52-week price change of 2.92%.)

In addition, they are all stocks that at least one major investment service feels should do well. Certainly not all stocks with such characteristics will excel. Yet these seem to have a lot going for them.

Good luck with your own tweaking of screens, investment results, and commitment to superior strategies.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

Value Investing / Main Index / previous / next