Microcap Trending Value
Microcap Trending Value is an investing strategy which selects for investment the microcap stocks with the highest momentum among the cheapest stocks in the universe. The strategy is inspired by Jim O'Shaunessy's strategy highlighted in What Works in Wall Street. Our implementation has generated returns of over 19% per year on average, with relatively low volatility, and low asset turnover.
Jim O'Sahunessy, in his book, What Works on Wall Street (4th edition) writes:
"When looking at the best growth strategies...we'll see that uniting value factors with growth factors can offer outstanding performance. Essentially, you are looking for cheap stocks on the mend; they are still cheaply valued but are gaining price momentum. You can improve the performance further by focusing on investable microcap stocks.
Our implementation of the Microcap Trending Value strategy is implemented as follows:
- We start with a universe of all the stocks trading in NYSE with a market cap above the 20th percentile (about $30M) and up to the 40th percentile (about $200M)
- Liquidity - We eliminate stocks with less than $5K traded daily on average
- We filter stocks based on Valuation - we keep the cheapest 10% of stocks based on a Composite of Value Multiples (P/E, P/B, P/Sales, EV/EBITDA, P/FCF, Shareholder's Yield)
- We filter stocks based on Quarterly and Bi-Quarterly Momentum - We keep stocks that delivered higher returns than the S&P 500 during the last Quarter and Half-Year, and eliminate the rest.
- We sort stocks based on Yearly Momentum - the higher the 52w returns, the higher the rank
Here are the results of a portfolio consisting of 25 stocks, equal weighted, rebalanced yearly, over a period of 19 years, between June 30th, 1999, and Junne 30th, 2018:
An amazing 19% average annual return vs. the Russell 2000 returns of 8.32% during the same 19 year period. A Sharpe ratio of 1.06, with a lower max drawdown than the market. Moreover, those results are achieved with asset turnover of 50.53% (i.e., selling and buying only half of the holdings every year) which ensures low taxes and low transaction costs. We believe that the results are absolutely amazing.
Price and valuation multiples are updated in 20min delay.
Last update date – see rightmost column
How To Invest
- Sort the list based on 52W Returns
- Buy the top 25 stocks with the highest returns
- Hold for one year and a day (to avoid short-term tax implications)
- On the rebalance date, sell the stocks which no longer appear in the screener (which means that they do not meet the screener criteria)
- Replace with the stocks in the list with the ones with the highest 52W returns