The Best of Both Worlds: Blending Value and Momentum

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As we know, the stock market can be fickle in the short term. There is no single investment strategy that offers a fool-proof method for earning returns and/or mitigating risk. Further, jumping from one approach to another while trying to predict what will happen next can lead to losses in the long run.

Since different methodologies perform well at different times, a good plan is to take a blended approach when writing your investment playbook. At Validea, we have found that combining a variety of guru-based models that perform differently in the same kind of market conditions (therefore reflecting a low degree of correlation) can reduce overall volatility in a portfolio. So, while the highs might not be quite as high, you can shave off some of the extreme lows. And, if done properly, a blended approach to portfolio building can also lead to improved returns in the long run.

One example of this would be the combination of value and momentum strategies. Results of a research study done by Cliff Asness of AQR Capital, Tobias Moskowitz of the University of Chicago and Lasse H. Pedersen at New York University and reported in their paper "Value and Momentum Everywhere" (2013) suggest that these two strategies work well together. The analysis illustrates that, over time, combining value and momentum methodologies across diverse markets and asset classes results in significantly higher risk-adjusted rates of returns.

Source: Research paper by Clifford S. Asness, Tobias J. Moskowitz and Lasse H. Pedersen, "Value and Momentum Everywhere"

According to an article appearing in AAII Journal after the study results were published, "modern portfolio theory indicates that when you combine assets that are not perfectly correlated, or move in opposite directions, both portfolio volatility and overall risk are reduced." The article adds that by combining the "best elements of two seemingly incompatible investment strategies," the study showed that an investor can "garner significant benefits."

Since its inception in 2003, Validea's Momentum Investor portfolio (10-stock, rebalanced monthly) has returned 192.2%, outperforming the market by 78.2%. This portfolio did particularly well in 2011, with gains of 20.9% versus zero growth in the S&P. In 2013, the portfolio again outperformed the S&P (gains of 51.6% versus 29.6%). Our Value Investor portfolio (also 10-stock, rebalanced), inspired by the investment strategies of Benjamin Graham, has returned 238.3% since inception in 2003, outperforming the market by 119.9%. In contrast to the Momentum portfolio, Value performed particularly well in 2012 (33.8% gain versus 13.4% for the S&P) and is showing well year-to-date with gains of 29.6% compared to 6.9% for the S&P.

Using both of these stock screening strategies, I've identified the following picks that might be of interest when considering a blended approach:


Fossil Group Inc. ( FOSL ) is a design, marketing and distribution company that specializes in consumer fashion accessories and operates in the Americas, Europe and Asia (market cap of $1.4 billion). Our Graham strategy favors the company's solid top line (12-month trailing sales of $3.16 billion), liquidity (current ratio of 3.60) and modest long-term debt to net current assets (0.83). Over the last ten years, this company has seen earnings-per-share more than triple. While Graham was averse to very high price-earnings ratios (he deemed such stocks speculative), he would favor a stock if the PE ratio multiplied by the price-book ratio was under 22. With a PE of 7.80 and a PB of 1.56, FOSL passes this test with flying colors.

Cal-Maine Foods Inc. ( CALM ) is engaged in the production, grading, packaging, marketing and distribution of shell eggs in the U.S. Brands include Egg-Land's Best, Land-O-Lakes, Farmhouse and 4-Grain. Our Graham-inspired model gives high marks to CALM's healthy liquidity (current ratio of 7.50), low leverage (long-term debt is only 1.7% of net current assets) and 10-year average EPS growth (206.3%) of more than seven times the minimum required by this screen. CALM's PE ratio of 10.70 is considered moderate under the Graham methodology.

Dril-Quip, Inc. ( DRQ ) designs, manufactures, sells and services engineered offshore drilling and production equipment across the globe. This company earns a perfect score under our Graham-based strategy based on its solid sales base of $712 million. The company is cash-rich as evidenced by a current ratio of 13.19, and has a debt-free balance sheet. Long-term EPS growth (10 yr. average) of 152.3% well exceeds the screen's 30% minimum, and PE ratio times PB ratio is within the maximum of 22 allowed under this model.


Supreme Industries, Inc. ( STS ) is a manufacturer of specialized vehicles including truck bodies, trolley and specialty vehicles. Under our Momentum investment strategy, the most recent quarter-over-quarter EPS growth of 84.62% is nearly five times the required minimum, and annual earnings growth of 30.86% meets the best-case scenario under this model (over 25%). This strategy favors STS's current stock price ($15.67) which is within 15% of its 52-week high ($17.77) and likes STS's relative strength of 94.

Argan, Inc. ( AGX ) , through its subsidiaries, provides engineering, procurement, construction, commissioning, operations management, maintenance, development, technical and consulting services to the power generation and renewable energy markets. Quarterly EPS growth of 62% well exceeds the 18% minimum required by our Momentum stock screen, and average annual earnings growth over the past five years of 27.09% more than satisfies this model. The company has a debt-free balance sheet, and return-on-equity of 19.3% exceeds the minimum requirement of 17%.

I'm long FOSL, CALM, DRQ, STS and AGX

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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