Market swings have put investor confidence to the test over the past four weeks and sentiment among stocks pickers now seems divided between concern about a market correction and fear of missing out if prices continue to leap ahead. For those looking to build a portfolio, picking up stocks with the best blend of business quality, attractive value and positive price and profits momentum can be a powerful strategy. But to give it even more firepower, it’s also worth looking at whether the company executives that run those companies have been backing themselves to succeed.
Cream of the crop
Tracking shares with the best blend of quality, value and momentum (QVM) is an investing tactic supported by academic research and the strategies of professional fund managers alike. At Stockopedia we keep a close eye on high ranking QVM stars to find baskets of stocks with high potential to outperform - and over this earnings season there have been some remarkable success stories. Last November we reported that education services business RM (LON:RM.) was ranking particularly highly as a value and momentum stock and it has since risen by nearly 30% in price to 148p after positive management announcements. While in December we highlighted transport group Go-Ahead (LON:GOG) as the best ranking quality and value mid-cap and it has since gained 21% to 2,126p.
But for investors looking for extra validation in volatile markets, it’s possible to add even more potency to QVM screening by examining the buying activity of directors and officers. Insider ownership, including recent director dealings, can be a hugely predictive signal. Research has found, as one might expect, that top company directors are excellent judges of the valuation and future share price performance of their own firms (Gregory et al). Interestingly, when you combine this finding with stocks that rank highly for QVM, the results can be astounding. In a study called Some Insiders are Indeed Smart Investors, researchers examined UK insider buying activity between 1994 and 2006. They found that a long-only strategy that combined director buying signals with value and momentum generated an annualised absolute return of 23.5% (Giamouridis et al).
Among those companies currently ranking highest for QVM - see the full list here - are…
