Experiment with Small Value Momentum

[MustacheAndaHalf]

I'm spawning a second momentum experiment, this time focused on individual stocks rather than entire sectors.  Individual stocks should better capture momentum than ETFs holding hundreds of stocks with mixed momentum.

According to Larry Swedroe's books, especially his book on factor investing, momentum is a long-standing factor found in both US and many other country's markets.  And in different asset classes like commodities and currency markets.

I'd like to experiment using 4 factors: the market, momentum, small, and value factors.  Stocks automatically incorporate market beta by virtue of being in the stock market.  For small caps, I will screen out stocks over 250M in market cap (probably considered "micro cap").  For momentum, I will use performance momentum of the past 12 months.  For value, I will use lower price/book stocks.

For the actual stock screen, I avoid "penny stocks" and those lacking volume.  I will ignore stocks under $4/share, and those trading less than 7,000 shares/day.  I will screen out stocks larger than 250M by market cap.  For performance, I will use beating the S&P 500 by the past 12 months.  But adding "value" to the screen requires being a little tricky.  I will keep increasing the minimum performance required to meet the screen's criteria until it results in just 20 stocks.  Then, I will sort those 20 stocks (the top 20 by performance) by price/book.  I will pick the lowest price/book stocks to represent value.

I will track the performance against Vanguard's Small Cap Value mutual fund.  Their style boxes should match, although the fund's momentum exposure could be considered more risky than it's benchmark.  I may also include the S&P 500, but not as a benchmark (since it's large cap blend, rather than small cap value).

As of right now, Vanguard Small Cap Value (VSIAX) is trading at $57.03 per share.  That will be the benchmark for this experiment.  Out of curiosity, Vanguard's S&P 500 Index Fund (VFIAX) is currently trading at $255.30, and I will compare performance to that as well sometimes, even though it's risk profile is dramatically different.

[MustacheAndaHalf]

I haven't finalized the number of stocks or trading frequency, but today I purchased the top 4 stocks meeting the criteria I set out above.  Note this is an experiment, and anyone attempting to follow it with their own money does so at their own risk.

I ran the screens as described in my first post, and wound up having to exclude one of the results: it only trades on the "pink sheets", and can't be submitted online.  Here's the other 4 stocks meeting the criteria which were puchased equally:

symbol, name, market cap, price/book, (12 mo - 1 mo) performance, stock price

UTSI (UTStarcom Holdings Corp), 197M, 2.2, +244%, $5.63
USAK (USA Truck, Inc), 209M, 3.1, +162%, $25.49
EDUC (Educational Development Corporation), 88M, 4.5, +184%, $21.90
QBAK (Qualstar Corporation), 23M, 4.3, +159%, $11.25

Note the stock prices quoted above are from the actual purchase of shares as part of this small value momentum experiment.

The fund will require some decisions, like putting EDUC above QBAK, above.  Their price/book are about the same, so performance moves EDUC to the #3 pick.  Similarly, the #5 fund that did not make the cut had a p/b of 4.4 but prior performance of 130%.

I'm guessing the fund will update every 2.5 or 5 weeks, but I haven't decided yet.  I also need to setup spreadsheets to track the fund's performance against it's benchmark.