Value-Quality-Momentum Portfolio

Value-Quality-Momentum Portfolio2018-06-21T16:47:34+00:00

The VQM (Value, Quality & Earnings Momentum) Portfolio is a quantitative model with set buy and sell rules. The research behind this focuses on the use of three long-known style factors in an attempt to outperform the market.

Value: Over the last thirty years, numerous academic papers have documented the successful outperformance of value strategies. Value strategies use fundamental metrics to find cheap stocks. We use three main value ratios in our ranking system:

  • Price to Sales
  • Price to Book Value
  • Price to Cash Flow

Quality: Quality generally refers to a company’s assets. Logically, stocks of companies that are profitable, stable and growing tend to outperform the market. Our approach concentrates on profitability and ranks stocks based on these criteria:

  • Gross Margin Growth
  • Operating Margin Growth
  • FCF/Assets Growth
  • Net Change in Cash TTM
  • Debt/Equity

Momentum: The momentum effect is almost as well known and documented as the value strategy. Momentum is the tendency of assets to show persistent, positive relative performance. It isn’t just confined to stocks but is present in almost all asset types. The most basic approach to momentum investing is to purchase the stocks that are performing the best over some time frame. However, this approach ignores fundamentals completely and is therefore vulnerable to including fad stocks with poor fundamentals. Research shows, however, that price momentum is actually a function of fundamental momentum. More specifically, most of the momentum effect can be explained by earnings momentum.

The momentum portion of our ranking system is based on the change in earnings estimates for this year and next year’s earnings.

This strategy is our core equity strategy. The simple idea is to buy the stocks of companies that are profitable and exhibiting momentum of earnings at low valuations.

A simple screen is used:

  • Market Cap > $2 billion
  • No industry greater than 40% of the portfolio.
  • Rank in top 10% for ROI.
  • 80th percentile or better on our proprietary VQ2 ranking system.

The stocks that pass the screen are then ranked using our Value/Quality/Momentum system and the top stocks are chosen for the portfolio. We can use either of two versions of this portfolio, one with 20-25 stocks and one with just 10 stocks. The portfolio is checked monthly for sell criteria:

  • Falls below the 85th percentile of our VQM ranking system.
  • 20% down from purchase price.
VQM Portfolio
Dividend Growth Portfolio
Earnings Revision Portfolio
Archer Portfolios

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