Momentum v Deep value Stock-Picking Strategies

These two approaches are poles apart.

One, probably the best for retail investors, searches the ranks of the most successful enterprises to ride their wave of popularity to higher levels. The inherent risk is in change of direction of mature trends.
The other looks for fundamental value in stocks that for one reason or another have lost favour with the market. It is potentially more lucrative, but must be supported by the diligent research and company familiarity that managed funds can provide. Timing is important, but such stocks can often be shorted first to enhance returns.
If retail investors are prepared to do their own homework such a counter-cyclical strategy may work for them too.

This post compares two of Australia’s largest Energy Suppliers, one a momentum opportunity (AGL), the other a possible deep-value play (Origin). The two have responded in diametrically opposite ways to the collapse in the last twelve months of the price of crude oil to less than US$30 per barrel.  Why the discrepancy? And which of two would be the better investment choice now?

1. Origin Energy, whose share-price in that time has fallen 70% from a high of $11.76 to a low of $3.50. It is still in a down-trend, but may have found support at $3.50.

2. AGL Limited  on the other hand has appreciated 36.8% from a low of $14.36 to a high at $19.65 on the 10th February 2016.

Since early December , after breaking through the resistance of the upper range at $17, the share-price has trended upwards strongly reaching a yearly and all-time high of $19.65 on the 10 Feb 2016.

AGL through the years has been an excellent portfolio addition for investors, showing capital growth as well as paying a reliable stream of fully franked dividends. Thus total shareholder return in the past year has been an impressive 27.7%, and over 5 years 11.3%

 Do your own research!

I do not have a logical reason as to why the share-price of AGL has gone to an all-time high whilst Origin has sunk to a record low, other than to say that it is just market forces. Might institutions be distributing AGL stock to reduce their risk, whilst profiting from the shorting of Origin shares at the moment?

Do you consider that the present market prices are a fair reflection of their value? Or do you think that once again the market has got it wrong? If so does it present you with an investment opportunity?

As always you should discuss your ideas with an appropriate qualified adviser before investing.

Categories: Chart Review, Investment

Tags: Deep value investing, Momentum investing