In his latest article for Canada’s Globe and Mail, Validea CEO John Reese says that, while many of history’s greatest investors have been value-focused strategists, momentum can also be a critical part of successful approaches.
“In fact, looking for stocks with good price momentum can be a big boost to returns — particularly during certain market conditions,” Reese writes. “James O’Shaughnessy, one of the gurus upon whose writings I base my Guru Strategies, has researched how the market’s affection for momentum varies over time. … His firm’s research has shown that momentum-type strategies tend to fare well in the second years of bull markets, and that the third year of a bull — which we are now in the middle of — tends to be “much friendlier to trend-following and high-yield strategies than to value.”
Reese says his Validea Canada Guru Strategies — each of which is based on the approach of a different investing great — have borne that out, with the three top-performing guru-based portfolios over the past year or so all including a relative strength criterion.
But Reese also offers a warning: “These and other successful momentum-focused strategies don’t look at relative strength in a vacuum; they use it as part of a broader approach that also examines fundamental and financial criteria. In doing so, they look for stocks that have the wind in their sails for a reason.”
Reese examines three picks with strong momentum that get interest from his guru-based models. Among them: Metro Inc., which gets strong interest from his O’Shaughnessy-inspired approach.