Mean Reverting Momentum, or, a Dead Cat Bounce?

There have been debates between those who argue for momentum and mean-reversion.  I say, “Why Choose? You can benefit from both.”  Stock performance tends to persist after 12 months of outperformance, and tends to mean-revert after 48 months of underperformance.  Tonight’s screen reveals 33 stocks that were in the bottom quartile over the last 4 years, but in the top quartile over the last year, with market capitalization over $100 million.

A few of the larger stocks I look at here like Citigroup (C) and AIG (AIG) make me sick, but that is a part of the exercise.  If you don’t  get a “gag reflex” from some stocks as a value investor, you may not be taking enough risk.  I am certainly not a fan of the financial guarantors, but they are here.  They survived, at least for now.

I would would consider the following stocks to be a “disbelief” portfolio.  High risk, high opportunity.  There are few people that wake up in the morning and say, “This is the portfolio that I want to own.”

Too many financials.  Too many overlevered, dodgy companies.  But maybe they will do well over the next month.  The probabilities favor it, but I will try to measure it over the next month.  Portfolios that outperform rarely look normal.

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