Follow-up on momentum

As a follow-up to the previous post, I looked at the performance of relative strength for companies with a market cap over £20m. I present the results below.

TABLE
     LOW    HIGH     NUM     SUM    RS6B
    -100     -90       0    0.00     NaN
     -90     -80       2  558.60  279.30
     -80     -70       4   40.19   10.05
     -70     -60       5  -33.71   -6.74
     -60     -50      18 -461.11  -25.62
     -50     -40      29   65.42    2.26
     -40     -30      47 -283.76   -6.04
     -30     -20      58  304.30    5.25
     -20     -10     115 -458.82   -3.99
     -10       0     183  956.58    5.23
       0      10     186  836.38    4.50
      10      20     153  826.18    5.40
      20      30      71  567.79    8.00
      30      40      26  229.99    8.85
      40      50      20 -157.14   -7.86
      50      60       4   43.27   10.82
      60      70       5   24.79    4.96
      70      80       8  208.15   26.02
      80      90       3    1.64    0.55
      90     100       5  294.50   58.90
     100     110       0    0.00     NaN
     110     120       2  -28.14  -14.07
     120     130       2  130.06   65.03
     130     140       2  -25.37  -12.68
     140     150       0    0.00     NaN
     150     160       0    0.00     NaN
     160     170       0    0.00     NaN
     170     180       1  -37.97  -37.97
     180     190       0    0.00     NaN
     190     200       1  -53.51  -53.51

     -20     100     779 3373.31    4.33
     -10     100     664 3832.13    5.77
       0     100     481 2875.55    5.98
      10     100     295 2039.17    6.91
      20     100     142 1212.99    8.54
      30     100      71  645.20    9.09
      40     100      45  415.21    9.23
      50     100      25  572.35   22.89
      60     100      21  529.08   25.19
      70     100      16  504.29   31.52
      80     100       8  296.14   37.02
      90     100       5  294.50   58.90
     100    1000       9  -47.08   -5.23

By way of explanation, for companies returning 40-50% over 6 months, of which there were 4, on average they 10.82% over the next 6 months.

The first table showed that results can be rather choppy over intervals of 10%. To try to smooth, I looked at incremental intervals from -20% to 90% in steps of 10% to 100%. What you see is that, generally, the higher the initial 6-month return the better. Looking at the intervals 100% to 1000% actually produced negative returns. This suggests that, generally, high relative returns in the first six months correlated positively to high returns in the following 6 months, although the relationship broke down significantly when the initial returns were over 100%.

Still, the results are encouraging. Momentum is good. It is not perfect: for example, the band 40-50% actually produced negative subsequent returns. I’m certainly not saying that there’s anything particularly magical about the band 40-50% that needs to be avoided. But there does seem to be a definite pattern that an investor can use if he exercises selectivity.

A few words need to be said about returns at the other end of the scale: -90% to -80%. The subsequent return was, apparently, 279.30%. Although this might suggest that companies with the most precipitous drops make the best purchases, the results could simply be spurious, and possibly subject to survivor-ship bias that is not fully accounted for in the database.

It is also worth noting that in my previous post, I found that high-performing companies often paid little or no dividend. They often had very high PEs, or negative PEs. Negative PEs or Earnings Yield featured very heavily on the list. On the top 20 list of companies with market caps over £20m, TCG (Thomas Cook) had a PE of 120, and THT (Thorntons) has a PE of 28. These are shares in recovery mode. It seems that investors will have to eschew conventional valuation metrics if they want to latch onto the big winners.

It’s never easy to determine how long the market will reward different types of investing, either in regards to momentum as a whole or the constituents of momentum. For example, it seems that recovery shares have been having a particularly good run in momentum. It could be that in the future good momentum performance comes from vanilla value investing, or straight growth companies.

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About mcturra2000

Computer programmer living in Scotland.
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