The three most common stock market anomalies are investing in small cap stocks, value stocks, and momentum stocks. Investors usually follow one or the other. James O'Shaughnessy combined value and momentum investing strategies in his book "What Works on Wall Street." One of the screens he devised first picks the stocks that have price-to-book ratios below one, and then buys the ones with the highest one-year price appreciation.
In a 52 year back testing this strategy returned an average annual compound return of 18.3% vs. 13% for the entire market. This strategy beats the market by more than 5 percentage points. Of course, this is based on average returns and annual performance of the strategy may significantly deviate from these values. We obtained the list of value stocks from Google Finance and ranked these stocks based on their 1-year returns. We included stocks with price-to-book ratios below 1.2 and eliminated illiquid stocks. Here are 30 momentum stocks with margin of safety:
Company name | Symbol | Market cap | 52w price change (%) | Price to book |
Lithia Motors, Inc. | 384.21M | 107.3 | 1.14 | |
Dillard's, Inc. | 2.41B | 63.62 | 1.11 | |
TICC Capital Corp. | 347.56M | 54.3 | 1.06 | |
Valero Energy Corporation | 17.06B | 53.04 | 1.15 | |
BreitBurn Energy Partners LP | 1.28B | 46.04 | 0.96 | |
Abington Bancorp, Inc. | 247.59M | 44.59 | 1.12 | |
Domtar Corp. (USA) | 3.89B | 39.07 | 1.2 | |
Allied World Assurance Co | 2.39B | 37.49 | 0.76 | |
Market Vectors Gold Miners ETF | 6.82B | 31.9 | 0.95 | |
Rockville Financial New Inc | 308.47M | 29.81 | 1.18 | |
Brookfield Infrastructure Partners | 2.51B | 29.26 | 1.03 | |
American Water Works Co., Inc. | 4.92B | 29.12 | 1.17 | |
Royce Value Trust Inc | 135.08M | 28.35 | 0.91 | |
Vodafone Group Plc (ADR) | 148.41B | 27.04 | 1.06 | |
XL Group plc | 7.63B | 26.74 | 0.71 | |
Protective Life Corp. | 2.49B | 26.61 | 0.68 | |
Aircastle Limited | 963.64M | 26.5 | 0.71 | |
iShares MSCI Malaysia ETF | 950.87M | 25.93 | 1.12 | |
RAIT Financial Trust | 281.51M | 25.52 | 0.28 | |
Meadowbrook Insurance Group | 555.42M | 24.88 | 0.97 | |
Endurance Specialty Holdings | 1.93B | 24.61 | 0.76 | |
Fresh Del Monte Produce Inc. | 1.54B | 24.27 | 0.95 | |
FNB Corporation | 1.27B | 24.04 | 1.11 | |
Portland General Electric | 1.80B | 22.32 | 1.11 | |
American Equity Investment Life | 777.91M | 21.98 | 0.79 | |
Capital One Financial Corp. | 23.78B | 21.95 | 0.9 | |
American Financial Group | 3.68B | 21.51 | 0.82 | |
ACE Limited | 21.72B | 21.48 | 0.93 | |
Reinsurance Group of America | 4.61B | 20.56 | 0.9 | |
Legg Mason, Inc. | 5.49B | 20.31 | 0.97 |
Some of these stocks are also favored by prominent hedge fund managers. Seth Klarman’s Baupost had $87 Million in BBEP stock. John Paulson and Eddie Lampert are among the Capital One (COF) investors. John Paulson, Bill Miller, and George Soros have also XL in their portfolios. Ken Fisher and David Dreman have Protective Life (PL) in their portfolios.
One of the most popular stocks among hedge fund managers is GDX. John Griffin’s Blue Ridge, David Einhorn’s Greenlight Capital, Roberto Mignone’s Bridger, Brevan Howard, and Craig Effron’s Scoggin are among hedge funds that are bullish about gold miners.
Disclosure: I am long VOD.
