High Momentum/ Low Beta / Small Cap

18th Feb '17 by Investor & Trader

16 comments 7699 reads

Please see attached my portfolio. The main reason for this post is to discuss the low beta impact on an otherwise potentially volatile portfolio i.e small cap and momentum.

Theory:

Momentum >=94
Small cap <= 800

i.e Momentum can move small caps more freely

Stock Rank - >=94
Quality - >= 80 (No junk stocks)
Value (rank >= 40) Nothing too expensive
EPS last interim greater than 0
PEG less than <=1.5, >0

and BETA - My theory is the low beta will reduce the negative effects of momentum in a downturn.....??

I use UK and European stock which have generated this portfolio (excluding TCS and EI)

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Investor & Trader

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Investor, Trader and Financial Educator As a long term investor/trader I have consumed hundreds of financial books and endured countless hours of self education. Hopefully my contribution through my channel will reduce the learning curve duration of many aspiring traders by providing the key information in a concise and enjoyable manner. https://www.youtube.com/channe... more »

16 comments

Investor & Trader

18th Feb '17

ps would be great to show average Beta on the portfolio analysis page.....

Investor & Trader

18th Feb '17

Interesting this portfolio screened shows a very low EPS growth?

underscored

18th Feb '17

"a very low EPS growth?" - Forecast

Trigger14

18th Feb '17

Yes beta should relate to cyclicality in principle but in practice it is just a correlation coefficient with the UK market and it doesn't always do a great job particularly for less liquid smaller stocks. Also the time period over which beta is calculated is relevant - great if the market has recently yo-yoed through recession but less so otherwise - now I don't think it would incorporate what happened in the 2008 downturn for instance. In your portfolio both Central Asia Metals (LON:CAML) and Somero Enterprises Inc (LON:SOM) are very likely to be highly cyclical and would get sold off in a downturn but have low betas. I don't know about many of the others but in my portfolio beta is a poor indicator of cyclicality.

Investor & Trader

18th Feb '17

Ok thanks Trigger. Your right I believe the Beta calculation is done on a 5 year look back so would not include the severe downturn, but would obviously capture the brexit.

Trigger14

18th Feb '17

Yes good point. Interesting it would capture Brexit because the main immediate effect was on the currency which benefited a lot of the companies who earn foreign currency. Perversely this might have led to the big defensive companies having high beta and the smaller UK cyclical companies having lower beta than would otherwise be the case.

PhilHofGrowYourDough

18th Feb '17

I use risk adjusted PEG - PEGR which is PEG combined with the beta of the stock.

http://www.stockopedia.com/ratios/risk-adjusted-peg-ratio-5050/

Not sure if that helps you?

PhilHofGrowYourDough

18th Feb '17

I use the PEGR to find cheap growth and I don't filter on value rank.
It means that I can get selections that appear expensive in the terms of Value Rank but provide cheap growth.

Investor & Trader

18th Feb '17

Thanks Phil, i'll look into the PEGR now....

Investor & Trader

18th Feb '17

Interestingly not much information at all on google regarding PEGR.

I have read the stockopedia explanation but what is considered a good PEGR range, what do you use Phil? based on your fantasy fund it seems to work :-)

PhilHofGrowYourDough

18th Feb '17

I use PEGR < 0.8 x industry median

I wanted cheap low risk growth compared to the relevant industry

PhilHofGrowYourDough

18th Feb '17

An example of the type of stock that gets spat out that appears expensive in terms of Value Rank was Adesso

I've held it since June 2014 for a 290% gain. It's struggling to hold onto it's > 80 Quality Rank of late but I'll keep riding it's price momentum for the time being.

Here's a link to the Stock Report back in April 2016 ... http://reports.stockopedia.co.uk/739837/Adesso_AG_GER_739837_20160405.pdf

EPS Growth of 74% and a PEG of 0.4
It certainly hasn't disappointed.

Nick Ray

18th Feb '17

If you are choosing stocks from UK and European markets you are not using the same "beta" for each stock. In fact, even if you restrict yourself to the UK the beta is calculated using a different index for different stocks.

Personally I am not convinced that beta is a good indicator anyway. It comes at the end of a long chain of reasoning from the Efficient Market Hypothesis, and my preference when using the EMH is to stick with the Sharpe Ratio as a test of a stock's risk-adjusted return (i.e. how close it is to the efficient frontier. I use a "minimum acceptable return" rather than the "risk free rate" to eliminate stocks with a low volatility but also a low mean return.)

Low beta cannot protect you from systematic (market) risk btw. It just means that your stock is not very highly geared in either direction (up or down).

PhilHofGrowYourDough

18th Feb '17

Here's Stockopedia's article on PEG http://www.stockopedia.com/content/the-peg-ratio-d...

and the section on PEGR references Estrada's paper ...

The Risk Adjusted PEG
A paper by Javier Estrada accused the PEG itself of being one dimensional due to the fact that it takes no account of the riskiness of a company’s share price. By adjusting the PEG by the share’s beta ( derived from the volatility of the share price) analysts can find a far more effective version of the PEG we like to call the PEGR which is calculated as {PE/G}xß . If you imagine company A being on a PE Ratio of 20 and PEG of 0.5 versus company B on a PE Ratio of 10 and PEG of 0.5. If company B was half as volatile as A, would it be a more attactive investment? The maths would suggest that in general yes. Estrada's study shows that low PEGR portfolios outperform both low PE and low PEG portfolios on a risk adjusted basis, suggesting that it may well be the true king of the value factors.

PhilHofGrowYourDough

18th Feb '17

Ah Donald my thumb down troll is on the prowl again!

Bless!

Investor & Trader

18th Feb '17

Haha it a thumbs up from me Phil...

Mind you fat fingers on a mobile don't help!

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High Momentum/ Low Beta / Small Cap

Theory:

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Investor & Trader

16 comments

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