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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About David Merkel 145 Articles

Affiliation: Finacorp Securities

David J. Merkel, CFA, FSA — From 2003-2007, I was a leading commentator at the excellent investment website ( Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and now I write for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I still contribute to RealMoney, but I have scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After one year of operation, I believe I have achieved that.

In 2008, I became the Chief Economist and Director of Research of Finacorp Securities. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm.

Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.

I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

Visit: The Aleph Blog

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