When Momentum Loses its Mojo

As we recently highlighted, the gap in multiples between momentum stocks and those priced at attractive valuations has exploded over the past few quarters. We don’t believe the level of the discrepancies can persist. A look at recent history highlights just how quickly trends can reverse.

Heading into the past several market downturns, momentum stocks have outperformed. In each case, their reign has come to an abrupt end, as illustrated above, once the economy regained its footing and prospects for companies improved. As bottom up investors, we are not making a forecast on the direction of the economy, but we do note that the quick change of fortune for yesterday’s winners underscores the risk for investors betting on momentum.

In the face of recent market uncertainty our approach has been to focus on companies with low debt levels, high free cash flow yields, and strong company specific catalysts. We believe these businesses are uniquely positioned to: a) provide downside protection in a volatile market, and b) benefit from an improving economic outlook.


Past performance does not guarantee future results.

The statements and opinions expressed in this article are those of the presenter(s). Any discussion of investments and investment strategies represents the presenter’s views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. Any forecasts may not prove to be true. Economic predictions are based on estimates and are subject to change.

Investing involves risk, including the potential loss of principal. There is no guarantee that a particular investment strategy will be successful. Value investments are subject to the risk their intrinsic value may not be recognized by the broad market.

Definitions: Free Cash Flow Yield: is calculated as the amount of cash a company has after expenses, debt service, capital expenditures, and dividends divided by either its current market price per share or enterprise value. Momentum: is the rate of acceleration of a security's price or volume. Russell 2000® Index: includes the 2000 firms from the Russell 3000® Index with the smallest market capitalizations. All indices are unmanaged. It is not possible to invest directly in an index.

Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.

CFA is a trademark owned by the CFA Institute.

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