Follow Up on Momentum Stocks

A few weeks ago, I wrote about the tremendous success of momentum stocks. I wanted to follow up and show you how much better a momentum strategy has done against value-based strategies.
The following chart shows you how the top 10% of momentum stocks have done against the top 10% of book value, P/E ratio, dividend yield and price-to-cash flow. It ain’t close.

The purple line is the overall market. I got the data from Ken French’s data library. The major glitch is that the cash flow and P/E ratio series begin about 25 years after the others.
I was surprised to see how well the P/E ratio decile (red line) does. It’s the only strategy that puts up a fight against momentum. Since 1974, the P/E ratio decile has slightly beaten the momentum decile.
To give you a clearer picture, here’s the relative performance of the different strategies:

Posted by Eddy Elfenbein on January 4th, 2008 at 7:26 pm

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