After yesterday's column, I was asked why I am focusing so much lately on momentum studies. After all, I am the deep value guy who concentrates on buying stocks well below asset value.
The reason is that I study everything. I am a hardcore geek. I am writing more about momentum simply because it is a powerful market anomaly that works almost as well as extreme deep value.
There is more than one way to skin the market kitty and some folks like the somewhat more active and exciting momentum approach. I try to be open minded and help folks find what works as well as what fits their personality and attitude.
When I combine momentum and value, even if I never use the exact dual momentum and value strategy I outlined yesterday, the screen and test provide some really valuable information. There is a pronounced gentle timing mechanism in the information. As the number of holdings in the portfolio is reduced, the more risky the market is becoming.
The results also strongly reinforces the idea that holding cash as a significant portion of your holdings when the count of portfolio holdings is low is just smart.
In both the early 2000s bear market and the 2008-2009 financial disaster, the number of holdings were very low. In the great excess of 1999, the model held almost no stocks until May 2002 and then it ramped up quickly.
Looking at the rolling test results, the portfolio's returns, at almost any point, produced outperformance of 30 to 50 percentage points until April 2000, when they drifted back into a more normal range of 10%-15% annually. Similar results were achieved during the credit meltdown, with the model underinvested for much of it from May 2007 until re-entering in a big way in October 2009.
So what does the model like now? As for most of its 15-year lifespan, it is in love with community bank stocks. The portfolio is about 50% in small banks trading below book value. These stocks are up for the year and are beating the S&P 500 over the past 52 weeks.
Always looking for an additional edge, we can cherry pick these dual momentum cheap banks and limit ourselves to those with activist or specialist involvement.
Waterstone Financial (WSBF) qualifies as it fits the model and both Joseph Stilwell and Lawrence Seidman are shareholders. So does one of my favorite long-term holdings, ESSA Bancorp (ESSA), as Maltese Capital, Stilwell, Wellington and Arbiter are all shareholders of the bank. MBT Financial (MBTF) is also a "dual momentum cheap bank," with a significant smart money presence, as Stilwell, FJ Capital, Patriot Financial, Castle Creek and Basswood Partners are all shareholders.
It's not all banks, however. Kelly Services (KELYA) is on the list. I made good money coming out of the credit crisis with this stock and it is cheap again, with the shares trading at just 83% of tangible book value. The company had a decent third quarter with earnings per share, excluding restructuring, of $0.23 vs. $0.10 in the 2014 period. I am kicking myself for not jumping into it in September, but there is still a lot of potential upside from current levels for the staffing company.
Those of you who prefer larger-cap stocks will find several worth a look. The poster children of the credit crisis, Citigroup (C) and American International Group (AIG), both make the dual momentum cheap stock list. So do Reinsurance Group of America (RGA) and Fidelity & Guaranty Life (FGL). It seems even the larger-caps in the model are favoring financials at the moment.
Bucking the sector trend, business development company Gladstone Investment (GAIN) is up on the year and beating the S&P 500. The shares are cheap right now at just 85% of book value, and as a bonus are yielding around 10%. The company operates as something of an LBO fund as it not only provides financing for buying U.S. companies with annual sales anywhere from $20 million to $100 million, it likes to take significant equity stakes in the target companies. It's a different approach than most BDCs use and seems to be working for Gladstone.
Combining the concepts of deep value and dual momentum can help you find interesting stock ideas. It can also provide market and sector information that helps you avoid blow ups and to buy when stocks are in the process of reaching a bottom.