There are, of course, many differences between value investors and momentum investors. Value investors pay attention to what a company’s shares are worth, whereas momentum investors focus almost exclusively on the direction of a company’s share price. Value investors “buy low, sell high” while momentum investors “buy high, sell higher.” And, while value investors will take a large position in a stock only if they understand the underlying company, momentum investors care little about the underlying company – they only want to see the shares rising faster than the market.
One other difference stands out: what happens when the stock price goes down?
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As the thesis behind a momentum stock is “the shares are surging upward,” the thesis is broken when the stock’s trajectory reverses to head downward. With the thesis broken, momentum investors sell.
The thesis behind a value stock is that “the shares trade at a large discount to what the company is worth.” If, after evaluating XYZ Corporations’s financials, products/services, management and other fundamentals, the value investor determines that it is worth $100/share but trades at $50, the stock is worth buying. Only when that thesis is broken, say, when the shares approach $100, or if the fundamentals turn out to be less worthy, does a value investor sell.
If the share price falls because XYZ Corporation reported a sloppy quarter, but the fundamental story remains intact, a value investor would happily buy more shares. That $100 value is now trading for $40, so the discount is larger and the shares are more attractive.
One of our recent Buy recommendations played out exactly this way. Kaman Corporation (KAMN) was an out-of-favor company with an array of misfit and half-developed defense and industrial products. In late October 2021, we saw that a highly capable new CEO joined the company and started upgrading Kaman’s product offerings while tightening its operations. The shares initially jumped 20% above our $37 purchase price but subsequently began an ugly slide to about $18. Momentum investors would have long since moved on to the next stock.
Astute value investors, however, seeing that the turnaround was making subtle but meaningful progress, would have been aggressively buying while the shares were stalled for over a year in the $18-$26 range. This “buy low” approach was rewarded when private equity firm Arcline Capital Management agreed to buy Kaman for $46 last month. While the shares generated a market-beating 25% return from our initial recommendation price, astute value investors captured a 100% return from their add-on purchases.
There are as many ways to make money in the stock market as there are investors. No single strategy is best for everyone, and no strategy is universally “right” or “wrong.” Some investors find that a value style works best. For others, a momentum, or growth, or quality, or index strategy is the right way to go. The key is to find a style that works for you, and then develop and master that style. We aim to help value and contrarian investors develop and master their craft.
As value and contrarian investing specialists, we focus on companies that have “the right stuff.” We do all the extensive idea searching and analysis to help you benefit from out-of-favor stocks. Our capabilities save you time while boosting your chances of profitable investing.
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Bruce Kaser has more than 25 years of value investing experience in managing institutional portfolios, mutual funds and private client accounts. He has led two successful investment platform turnarounds, co-founded an investment management firm, and was principal of a $3 billion (AUM) employee-owned investment management company.
