Turning your back to all of the available information can lead to false conclusions. . .
When it comes to selecting stock factors, I am admittedly agnostic. I constantly remind myself to let the data speak for itself, all while layering in a bit of common sense. I resist the urge to label myself a value guy, or momentum guy. (Or even a high asset turnover declining short interest guy.) That being said, both a trendfollowing and value approach make sense to me, and contrary to popular belief, are not mutually exclusive.
(Speaking of trendfollowing, after posting back to back double-digit negative years – and a -25% start to 2007 – Merrill Lynch is pulling ~ $600M from the John Henry funds, ending an 11-year relationship. Time to buy some RYMFX?)
There are truckloads of academic evidence supporting both the momentum and value approaches, and I am not going to do a lengthy review here. CXO reviews a paper from a couple years back titled, “The 52-Week High and Momentum Investing“. Simply put, buying new highs works. A great paper by the guys at Blackstar also confirms this hypothesis – “Does Trendfollowing Work on Stocks?“. (My favorite part about the Blackstar approach is that it is backed up with empirical evidence that resembles a real world trading system including delisted stocks and volatility based risk management.)
Below is some quick-and-dirty evidence since 1987. Column 1 is S&P500 return, Column 2 is the top 50 stocks ranked by price/52-week high (near or at highs), and Column 3 is the bottom 50 stocks ranked by price/52-week high (stocks near 52-week lows). Only companies >$100M market cap were included, and the portfolio rebalances yearly.
The site I used is backtest.org, and is great for simple queries using the Value Line database (which if I remember correctly, is about 2000 stocks).
I examined the hedge fund best ideas portfolio to query if the funds were buying stocks near their highs or lows. Of the 20 stocks listed, the average distance from the 52-week high was 6.44%, and the median was 2.73%. the results are skewed due to the large distance away from highs for USG (46%) and BSG (23%). Most of the other 18 stocks are at or near 52-week highs. Depending on the index, the average stock is somewhere between 10 – 30% from the 52-week high.
It looks like the hedge funds are buying stocks that are going up (or the stocks are going up because the hedge funds have been buying them).
I also decided to input the Hedge Fund Best Ideas portfolio into the Morningstar X-Ray software to see what the composite portfolio looked like. Below are the stats for the portfolio, followed by the ratio relative to the S&P500:
Price/Earning Forward: 21.47, 1.35
Price/Book Ratio: 2.70, 1.00
ROA: 6.87, .62
ROE: 16.67, .84
Projected EPS Growth: 19.37, 1.7
Yield %: .68, .42
Average Market Cap: $24B, .45
It sure seems like the value hedge funds are finding more “value” in growth stocks right now. . .
A slightly different indicator is a chart courtesy of DecisionPoint.com charting the historical trend of S&P500 stocks relative to their 52-week RANGE. I imagine it correlates highly with average % from Hi and % of stocks above the 50-Day SMA.