"Momentum trumps valuation" article, my highlights, March 07, 2000 by Loren Fox
At times, the market of technology stocks seems propelled by nothing
more than its own momentum, blind to price-to-earnings or other
valuation measures. This is not the exclusive province of individual
traders chasing hot stocks. Momentum investing has a long tradition at
institutions, too.
"We are momentum players," says William "Beau"
Duncan, who has run Duncan-Hurst Capital
Management since 1990. "Valuation is not part of
our process."
This hasn't hurt his results. Duncan says the firm's
$21 million Aggressive Growth Fund (DHAIX),
which he manages, rose 104 percent from its April
inception to the end of 1999. About 60 percent of the
fund is in technology shares, and it's no surprise that
the market's current hot sector --
business-to-business Internet stocks -- is what
interests Duncan most. Among the Aggressive Growth Fund's holdings
are such stocks as VerticalNet (VERT), a developer of niche online
marketplaces, and life sciences market maker Chemdex (CMDX).
Duncan looks for stocks that have already begun to move. He starts by
screening for stocks that are rising relative to an index or industry group.
He couples that with strong earnings or revenue momentum to find
possible investments. He sells a stock when he sees erosion in both
relative price strength and financial performance.
Duncan's view, which is increasingly popular, is that traditional valuation
doesn't do a good job of valuing stocks in hyper-growth mode, so
valuation's importance has lessened. He also contends that momentum
players are not the cause of the stock market's heightened volatility. The
cause is Internet stocks' high growth rates, and high growth has always
meant high volatility.
He believes the economy has changed so that the risk of inflation is
lower, and that means high growth rates are more sustainable. Says
Duncan, "That allows you to pay a high premium for growth stocks." |
