Charles Kirkpatrick’s approach to value and momentum investing

Kirkpatrick believes that investors face an impossible task in predicting the market or the economy. His approach is to look for fundamental and technical indicators as a signal to buy and sell stocks. Central to this philosophy is a focus on relative strength – the performance of a stock price versus the rest of the market. Beyond that, he looks for value and growth drivers to hone the strategy.

Investment strategy

Kirkpatrick’s approach is mechanical he relies less on what the company actually does and more on ‘relative’ indicators connected to the stock price and fundamental data. He is a strong believer in behavioural biases, so his strategy seeks to strip out potential frailties like investor impatience, lack of discipline and fear of being wrong.

He employs a three-step process called STRACT – setup, trigger, and action – which he uses to react to individual price share price movements. His buy and sell indicators include price-to-sales, reported earnings growth, and share price strength. He also point & figure charts to help in the buy and sell decision process.

Using those factors he developed three investment models – Growth, Value and Bargain.

  • With Growth, he looks for stocks in the top 10% of the market for relative price strength over the previous 130 days (on page 119, he suggests increasing that to 20% if overly restrictive). In addition, he screens for stocks in the top 10% of the market for relative reported earnings growth over the previous four quarters.

  • With Value, the relative price and reported earnings growth once again apply. This time, he also wants to see a relative price-to-sales ratio that ranks among the lowest 30% of the market.

  • In the Bargain model, the demands are even more precise. Stocks ideally need to be displaying relative strength in the top 3% of the market, while the relative price-to-sales ratio has to rank in the 17th to 42nd percentiles.

The only restrictions on the models are that the minimum share price for a stock has to be $10. Value model stocks must have a minimum market cap of $500 million, while growth and bargain stocks need to be valued by the market at $1 billion+.

When to sell

As a technician, Kirkpatrick had very fixed views on when to sell stocks in each of his three models. In varying degrees, all sale triggers involved a substantial negative change in the relative strength of the price, the reported earnings growth rank and the price-to-sales ratio rank.

  • With Growth, stock are sold when the relative price strength rank falls to below 30% in the market; relative reported earnings growth rank falls below 70% and the stock price falls below two previous notable lows.

  • In Value, the sell drivers are when the relative price strength rank falls to below 30% in the market are when the relative reported earnings growth rank drops below 50% against the market. Kirkpatrick didn’t use the price-to-sales ratio as a sell indicator in this model.

  • In the Bargain model, Kirkpatrick’s precision screening involved selling stocks when the relative price strength ranked below 52% in the market and when the relative price-to-sales ratio ranked below 7% or above 67%.

At Stockopedia, we have modelled Kirkpatrick’s three investment approaches – and they are currently delivering mixed results based on the year to date. The best performer is the Value model (albeit with just one company in it), which screens for stocks with a minimum market cap of £100m. Each stock must be in the top 20% of the market on a 130-day moving average basis; in top 30% on a price-to-sales rank and the top 10% on an operating profit growth basis. On those filters the screen has produced a return of 29.1% versus a 5.8% for the FTSE 100 in the year to date. Meanwhile, the Bargain screen has produced a year-to-date return of 9.9% while the Growth screen is in negative territory at -2.2%.

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