Combined Momentum Portfolio: Piotroski F-Score & SMA of Closure Price

In the following steps we describe the filters of the portfolio stock selection.

Strategy Filters

The "Combined Momentum" strategy employs a set of filters to identify stocks that demonstrate favorable growth prospects while filtering out those that do not meet the criteria. These filters ensure a systematic and disciplined approach to stock selection, increasing the likelihood of identifying stocks with strong momentum. The following screenshot shows the portfolio's filter.

Filter 1: Piotroski F-Score (Quarterly)

The first filter, the Piotroski F-Score (Quarterly), assesses a company's financial strength and overall health. Stocks are considered if their quarterly Piotroski F-Score is greater than the first quantile of all companies.

Filter 2: Growth Rate (over 2 Quarters) of SMA of Closing Price

The second filter evaluates the growth rate of the Simple Moving Average (SMA) of the closing price over a two-quarter period. Stocks with a growth rate exceeding the third quantile of all companies meet this criterion.

Filter 3: Growth Rate (over 1 Year) of SMA of Closing Price

The third filter analyses the growth rate of the SMA of the closing price over a one-year period. Only stocks with a growth rate higher than the third quantile of all companies pass this filter.

Filter 4: Growth Rate (over 1 Quarter) of SMA of Closing Price

The final filter examines the growth rate of the SMA of the closing price over a one-quarter period. Stocks displaying a growth rate greater than the third quantile of all companies meet this requirement.

Strategy Intent

The "Combined Momentum" strategy intends to capture stocks with strong growth potential while avoiding those that may underperform. By focusing on stocks exhibiting favorable financial health and strong performance indicators, the strategy aims to enhance the likelihood of generating above-average returns.

Identifying Growth Opportunities

The strategy's filters work in synergy to identify stocks with promising growth prospects. By considering factors such as the Piotroski F-Score and growth rates of SMA, potential investors can target companies displaying positive momentum and robust financial fundamentals.

Disciplined and Systematic Approach

The "Combined Momentum" strategy follows a disciplined and systematic approach, relying on specific quantiles and thresholds to select stocks. This methodology minimizes subjective biases and ensures a reliable and repeatable investment process.

Strategy Nature

"Combined Momentum" is a quantitative investment strategy that harnesses the power of Simple Moving Averages (SMA) and filters to guide stock selection. By leveraging historical price data and key financial indicators, the strategy seeks to identify stocks with favorable momentum and growth potential.

Utilizing Historical Data and Performance Metrics

The strategy analyzes historical data and performance metrics to evaluate stocks. By considering the growth rates of SMA over different time periods, potential investors can benefit from quantitative analysis and make evidence-based investment decisions.

Emphasizing Momentum and Growth Potential

The "Combined Momentum" strategy focuses on momentum and growth potential as key drivers for stock selection. By combining multiple filters and performance indicators, the strategy aims to identify stocks with a high likelihood of outperforming the broader market.

Backtest Results

To verify the performance and efficacy of the "Combined Momentum" strategy, extensive backtesting was conducted using historical data from November 2013 to March 2023. The results revealed impressive outcomes, highlighting the potential of this investment approach.

During the backtesting period, the "Combined Momentum" strategy showcased a Compound Annual Growth Rate (CAGR) of 15.3%. This remarkable performance outperformed the CAGR of the S&P500 benchmark, which stood at 7% over the same period.

These results indicate that the strategy has the potential to generate above-average returns for investors.

The strategy's ability to consistently identify stocks with favorable growth prospects and strong momentum contributed to its superior performance. By implementing the set filters and adhering to the predefined rules, the strategy was able to capture stocks exhibiting positive financial health and robust growth indicators.

The backtest results validate the effectiveness of the "Combined Momentum" strategy and provide potential investors with confidence in its ability to deliver favorable returns. However, it is important to note that past performance does not guarantee future results, and investment decisions should consider the inherent risks associated with the stock market.

Conclusion

The "Combined Momentum" strategy, utilizing Simple Moving Averages (SMA) on the closing price and a set of filters, presents a promising investment approach. With a focus on momentum, growth potential, and disciplined stock selection, this strategy has demonstrated its ability to outperform the S&P500 benchmark.

By combining rigorous filters, evaluating key financial indicators, and leveraging historical price data, the strategy aims to identify stocks poised for growth and filter out underperforming ones. The impressive backtest results, showcasing a 15.3% CAGR compared to the 7% CAGR of the S&P500 benchmark, underline the potential of the "Combined Momentum" strategy to generate attractive returns for investors.

However, it is essential for potential investors to conduct their own due diligence, assess risk tolerance, and consider their individual investment goals before implementing any investment strategy. The "Combined Momentum" strategy offers a systematic and disciplined approach that can be a valuable addition to an investor's toolkit, enabling them to potentially capitalize on the momentum and growth opportunities within the stock market.

The strategy was created using the Stock Screener tool from SimFin and was subjected to backtesting. Details on the quantitative criteria and the backtesting results can be viewed in detail here: https://app.simfin.com/portfolio/6410acd6a86e3d55b2c4b886

Disclaimer: The information in this article is for educational purposes only and should not be construed as financial advice. The author is not acting as a financial advisor, and readers are solely responsible for their investment decisions. The author and publisher disclaim any liability for losses or damages resulting from the use of this information. Investing carries risks, and past performance is not indicative of future results. It is essential to conduct thorough research and consult with a qualified financial professional before making any investment decisions. Readers should independently verify information and consider their own financial situation and risk tolerance.