Momentum Strategies (Part 2)

An academic paper read by Sawyer Investment Management Company regarding the effects of price momentum and earnings momentum on stock returns (Part 2)

Abstract:
We examine whether the predictability of future returns from past returns is due to the market's underreaction to information, in particular to past earnings news. Past return and past earnings surprise each predict large drifts in future returns after controlling for the other. Market risk, size, and book-to-market effects do not explain the drifts. There is little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Security analysts' earnings forecasts also respond sluggishly to past news, especially in the case of stocks with the worst past performance. The results suggest a market that responds only gradually to new information.

Citation:
Chan, L. K. C., Jegadeesh, N., & Lakonishok, J. (1996). Momentum Strategies. Journal of Finance, 51(5), 1681–1713.

Link to Paper:
https://kantakji.com/media/174618/file1391.pdf

About Sawyer Investment Management Company:
SIMCO is a Texas-registered Investment Adviser with its principal place of business in Dallas, Texas. It was formed on January 1, 2015 and is wholly owned by Ryan Sawyer, who is a CFA Charterholder and a Certified Public Accountant.

SIMCO specializes in the construction of equity portfolios, and is therefore an ideal resource for long-term investors. The firm goes through a rigorous process for selecting each and every holding in the portfolio. Rooted in the empirical research of academia, the portfolios are generally characterized as large-cap value momentum. For more information about how the portfolios are managed, see our website.

www.sawyerinvestment.com
https://www.facebook.com/Sawyer-Investment-Management-Company-1588110057913467/
https://twitter.com/SawyerInvest
https://sawyerinvestment.blogspot.com/

Momentum Strategies

An academic paper read by Sawyer Investment Management Company regarding the effects of price momentum and earnings momentum on stock returns.  (Part 1)

 Abstract:
We examine whether the predictability of future returns from past returns is due to the market's underreaction to information, in particular to past earnings news. Past return and past earnings surprise each predict large drifts in future returns after controlling for the other. Market risk, size, and book-to-market effects do not explain the drifts. There is little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Security analysts' earnings forecasts also respond sluggishly to past news, especially in the case of stocks with the worst past performance. The results suggest a market that responds only gradually to new information.

Citation:
Chan, L. K. C., Jegadeesh, N., & Lakonishok, J. (1996). Momentum Strategies. Journal of Finance, 51(5), 1681–1713.

Link to Paper:
https://kantakji.com/media/174618/file1391.pdf

About Sawyer Investment Management Company:
SIMCO is a Texas-registered Investment Adviser with its principal place of business in Dallas, Texas. It was formed on January 1, 2015 and is wholly owned by Ryan Sawyer, who is a CFA Charterholder and a Certified Public Accountant.

SIMCO specializes in the construction of equity portfolios, and is therefore an ideal resource for long-term investors. The firm goes through a rigorous process for selecting each and every holding in the portfolio. Rooted in the empirical research of academia, the portfolios are generally characterized as large-cap value momentum. For more information about how the portfolios are managed, see our website.

www.sawyerinvestment.com
https://www.facebook.com/Sawyer-Investment-Management-Company-1588110057913467/
https://twitter.com/SawyerInvest
https://sawyerinvestment.blogspot.com/

The Profitability of Momentum Strategies

The authors study the effects of price and earnings momentum over the period 1973-1993 in the United States equity market.  They find that winners over the past 6 months significantly outperform losers over the next 6-12 months.

Drilling in, they find that price momentum produces better returns for longer holding periods than earnings momentum.  They contribute this to the theory that earnings is more of a short-term measure; whereas price changes could be due to very long-term changes.  They even found these things to be true for large-cap stocks, which would be expected to not exhibit as much momentum capture due to their better and more public information than that of small-caps.

They contribute this effect to several possibilities: the market does not fully respond to new information, due to investors' conservatism bias (where they are reluctant to change prior opinions); or maybe by analysts being slow to revise estimates.  They note that the momentum effect is not caused by the trades of trend chasers, because there is no subsequent reversal to bring the stock back to equilibrium (even out to the 3rd year).

Chan, L. K. C., Jegadeesh, N., & Lakonishok, J. (1999). The Profitability of Momentum Strategies. Financial Analysts Journal, 55(6), 80.