by John Bajkowski

Kevin Truitt illustrates how investors can benefit by combining traditional value and price momentum filters in his July 2013 AAII Journal article Investings Odd Couple: Value and Momentum. Research cited by Truitt highlights fundamental and technical factors that can be combined to help avoid both value traps and overvalued momentum stocks. It is possible to combine growth and value approaches with good track records into a combined approach with high expected return, but even lower expected volatility. Growth and value approaches tend to shine in different market environments, providing diversification benefits.

This issues First Cut applies the key factors highlighted in the article using AAIIs stock screening and fundamental database, Stock Investor Pro .

The starting universe of 4,953 stocks consisted of exchange-listed companies. The First Cut first looked for companies with price-earnings ratios (price divided by trailing 12-month earnings per share) lower than the median industry ratio in which the company is classified. This type of relative comparison adjusts automatically to industry prospects and overall market conditions. The First Cut then filtered for companies with a PEG ratio (price-earnings ratio divided by five-year historical growth rate) to be either below the industry median or below 1.0. The screens final fundamental test required that the ratio of enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization) be 10 or smaller. Enterprise value is calculated by adding market capitalization, preferred stock and total debt, and reducing this sum by the amount of cash held by the firm. The enterprise value to EBITDA ratio relates a firms takeover cost to its earnings potential. The lower the ratio, the more attractive the firm. A total of 362 exchange-listed stocks passed all of the value filters.

Stock Investor Pro does not have moving averages, so the First Cut employed two of the three primary technical filters identified in Truitts article. The passing companies have relative strength percentage ranks that highlight improving recent price performance. The First Cut required the four-week relative strength rank to be greater than the 13-week rank, which was greater than the 26-week rank, which in turn was greater than the 52-week relative price strength rank. The final filter required that a stocks current price be within 25% of the 52-week high (price as a percent of 52-week high greater than 75%). A total of 161 exchange-listed stocks passed the price momentum filters.

Only 13 exchange-listed stocks passed both the value and momentum filters and they made the First Cut. The table ranks these stocks by how close they are trading to their 52-week high. Mixing growth and momentum strategies offers investors the potential for higher risk-adjusted returns. The combination helps to avoid falling knives, undervalued stocks without catalysts or even high-flying stocks unsupported by their fundamentals.

Firms With a Combination of Value and Momentum