How to Combine Value Investing and Momentum Investing (Part 2/2)

We find that sorting stocks on value and then momentum has been a historically successful strategy. However, sorting stocks on value and then quality, which is inline with a fundamental value philosophy, works just as well, if not better. We hypothesize that the "momentum" effect identified within the cheap stocks bucket, is really a proxy for strong fundamentals and positive operational momentum among the cheapest, highest quality value stocks. Our preference--based on empirical and philosophical grounds--is to go with a more "pure" value philosophy that focuses on buying the cheapest, highest quality value stocks, as opposed to a muddled value approach that buys the cheapest, highest momentum value stocks.

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