Momentum vs. Value Investing
- Posted by Robert Sinn
- on July 20th, 2012
In equity markets there are a few timeless debates that will never go away. We all know about the constant struggles between fundamental and technical analysis or the battle between active managers and those who take a more passive approach. However, perhaps the most interesting and intellectually stimulating debate is offered by momentum investing vs. value investing.
Momentum investors buy stocks that are experiencing fundamental momentum in their businesses and price momentum in their share prices, while shorting stocks which are experiencing fundamental business challenges and strong downward price trajectory in their share prices.
Value investors look to identify stocks trading at attractive valuations within share price downtrends due to the market’s perception that the company’s business is experiencing a slowdown and/or faces mounting challenges.
There is no single answer as to how to achieve investment success – in fact many highly successful investors use a combination of both momentum and value investing strategies. Moreover, both momentum and value investing suffer from similar shortcomings and challenges: Successful momentum investing relies on key judgment calls such as when to take profits and how to identify the signs of slowing fundamental and technical momentum, whereas, successful value investing depends on the investor to identify companies that are cheap for the wrong reasons (flawed market perception etc.).
There are a multitude of examples of both types of investing but this morning’s example of lost momentum in a stock that was last year’s top performer in the S&P 500 is extremely noteworthy:
Aside from the fundamental challenge of maintaining 20%+ earnings & revenue growth and 30%+ annual share price gains there were strong warnings in the chart recently that trouble may lie ahead. Notice the heavy distribution days April 19th-24th and then again on June 27th and 28th – this was one of the main reasons why I decided to take bearish positions heading into yesterday’s earnings report.
The CMG example demonstrates how quickly momentum can go awry and just how difficult market timing can be. Not only is CMG a momentum portfolio manager favorite but the stock received an upgrade to buy with a $490 price target from Citi on Tuesday morning:
“We think SSS for 2Q could be in the 10-11% range which would be better than some recent sell-side checks that indicate sales trends moderated into the 7-8% range. Although there may be some pressure on the high end consumer due to macro concerns, we think they continue to spend on affordable luxuries such as natural and organic food.” Citi CMG upgrade 7/17/2012
Thanks guys, got any other great ideas?……
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Robert Sinn is a professional trader and market analyst who focuses on multiple asset classes including equities, futures, options and currencies. He integrates fundamental and technical analysis. More »