The Twin Momentum strategy implemented by Validea is based on research by Dashan Huang and his colleagues, who discovered that combining fundamental and price momentum could lead to significant market outperformance. Their research showed that while both types of momentum individually provided excess returns, the combination of the two factors created an even more powerful investment approach.
The Two Pillars of Twin Momentum
Fundamental Momentum
The first component examines a company’s fundamental momentum using seven key variables:
- Earnings
- Return on equity
- Return on assets
- Accrual operating profitability to equity
- Cash operating profitability to assets
- Gross profit to assets
- Net payout ratio
Companies are ranked based on these metrics, with the strategy focusing on firms in the top 20% of the universe. This fundamental screening helps identify companies with strong and improving business performance.
Price Momentum
The second component looks at price momentum, specifically examining the twelve-month return excluding the most recent month. This approach, known as “12-1” momentum, has been well-documented in academic research. The strategy targets companies in the top 20% based on this metric.
Benefits of Twin Momentum Investing
The Twin Momentum approach offers several advantages:
- Dual Validation: By requiring both fundamental and price strength, the strategy helps confirm that a company’s stock price gains are supported by improving business fundamentals.
- Reduced False Signals: The combination of two different types of momentum helps filter out companies that might look attractive based on just one factor.
- Academic Backing: The strategy is grounded in peer-reviewed research and builds upon decades of academic work on momentum investing.
- Systematic Approach: The quantitative nature of the strategy removes emotional bias from the investment process.
Top-Scoring Twin Momentum Stocks
Here are five companies that currently score highly according to Validea’s Twin Momentum strategy:
1. Texas Roadhouse (TXRH)
- Strategy Score: 100%
- Company Description: Texas Roadhouse operates casual dining restaurants under multiple brands including Texas Roadhouse, Bubba’s 33, and Jaggers.
- Performance Factors:
- Fundamental momentum ranks in the 3rd percentile
- 12-1 month return of 68.93% ranks in the 11th percentile
- Combined ranking places it in the 1st percentile of the database
2. Broadcom Inc. (AVGO)
- Strategy Score: 100%
- Company Description: A global technology company designing and supplying semiconductor and infrastructure software solutions.
- Performance Factors:
- Fundamental momentum ranks in the 1st percentile
- 12-1 month return of 69.47% ranks in the 10th percentile
- Combined ranking places it in the 1st percentile
3. Cal-Maine Foods (CALM)
- Strategy Score: 100%
- Company Description: The largest producer and distributor of fresh shell eggs in the United States, offering conventional, cage-free, organic, and specialty eggs.
- Performance Factors:
- Fundamental momentum ranks in the 1st percentile
- 12-1 month return of 44.02% ranks in the 19th percentile
- Combined ranking places it in the 2nd percentile
4. Bank of New York Mellon (BK)
- Strategy Score: 100%
- Company Description: A global financial services company providing investment management, investment services, and wealth management.
- Performance Factors:
- Fundamental momentum ranks in the 3rd percentile
- 12-1 month return of 60.17% ranks in the 13th percentile
- Combined ranking places it in the 1st percentile
5. Taylor Morrison Home Corp (TMHC)
- Strategy Score: 100%
- Company Description: A national homebuilder and land developer operating across multiple states, offering homes across various price points.
- Performance Factors:
- Fundamental momentum ranks in the 3rd percentile
- 12-1 month return of 49.71% ranks in the 16th percentile
- Combined ranking places it in the 2nd percentile
A Different Approach to Momentum
The Twin Momentum strategy offers a sophisticated approach to momentum investing by combining both fundamental and price momentum factors. The strategy’s academic foundation and systematic approach make it an attractive option for investors looking to capture momentum effects in the market while maintaining a disciplined investment process. The combination of fundamental and price momentum provides a more robust framework compared to single-factor momentum strategies.
Further Research
