Why Value Investors Shouldn't Ignore Momentum

“Don’t chase performance” is a lesson any good value investor should have learned. But in a piece for Canadian MoneySaver, Validea CEO John Reese looks at how keying on high-momentum, hot stocks can actually help boost returns in a value-oriented portfolio.

“Remember, ‘cheap’ and ‘falling’ are two separate concepts (just as ‘expensive’ and ‘rising’ are),” writes Reese. “Sometimes a stock is so cheap that it can go on a tear and still be undervalued. Other times, a firm’s business will excel as its shares surge, and earnings, sales, and/or book values keep up with (or outpace) the stock’s price gain. That keeps valuations low.”

In those situations, strong momentum is an added boost, Reese says. “Some of history’s best stock-pickers have found that stocks with strong momentum are often good bets to continue rising — if they’re still attractively valued,” he writes. “While buying a hot stock with an exorbitant valuation can be the equivalent of jumping on a rocket ship that’s almost out of gas and about to plummet back to Earth, buying a hot stock that’s still cheap is like jumping on a ship that has plenty of fuel left in the tank.”

Reese talks about how some of history’s best investment strategists have melded value and momentum in their approaches. He also looks at several high-momentum, attractively valued US and Canadian stocks that get high marks from his Guru Strategies. Among them: generic pharmaceutical firm Lannett Company.