Combining Value and Momentum Screens

Value and momentum are two of the most well-documented factors in academic finance, each with decades of evidence supporting their ability to generate excess returns. But here is what makes them truly powerful: they work even better together. Value investing tends to buy stocks that are out of favor and cheap, while momentum investing buys stocks that are trending higher. Combining them creates a screen that finds cheap stocks that are starting to work — arguably the best of both worlds.

The logic is intuitive. A pure value screen can trap you in stocks that are cheap for good reason — the dreaded value trap. A pure momentum screen can have you chasing expensive stocks at the end of their run. But a stock that is undervalued AND showing positive price momentum is one where the market is beginning to recognize the value, giving you both a margin of safety and a catalyst for re-rating. This guide shows you how to build this dual-factor screen.

What to Look For

A combined value-momentum screen targets stocks at the intersection of cheapness and trend:

• Below-average valuation multiples: Look for stocks trading at a discount to the market on classic value metrics like price-to-earnings (P/E below 15), price-to-book (P/B below 2), or price-to-free-cash-flow (P/FCF below 15). The stock should be objectively cheap relative to its fundamentals.
• Positive price momentum over 3-12 months: The momentum component requires the stock to be in an uptrend despite being cheap. Look for positive returns over the trailing 3-month, 6-month, or 12-month periods. The ideal candidate has recently turned from negative to positive momentum — a trend inflection point.
• Relative strength vs. sector: Beyond absolute momentum, check whether the stock is outperforming its sector peers. A value stock that is gaining relative strength within its sector suggests company-specific improvement, not just a sector-wide move.
• Improving fundamentals: The best value-momentum candidates often show improving earnings estimates or recent positive earnings surprises. This fundamental improvement is frequently the catalyst that turns a value stock into a momentum stock. Rising estimates confirm the momentum is fundamentally driven.
• Reasonable quality floor: Add a minimum quality filter to avoid the cheapest, lowest-quality stocks. Require positive earnings, positive free cash flow, and manageable debt levels. This prevents the screen from surfacing distressed companies that are cheap and bouncing for unsustainable reasons.

How to Set Up the Screen

Building a value-momentum screen requires layering filters from both disciplines:

1. Start with a value filter: set the P/E ratio below 15 or price-to-free-cash-flow below 15. This establishes the value component and ensures you are looking at fundamentally cheap stocks.
2. Add a momentum filter: require positive 6-month price performance. This ensures the cheap stock is trending in the right direction and filters out value traps that continue to decline.
3. Layer on a quality floor: require positive trailing EPS and positive free cash flow. This eliminates distressed companies that are cheap because they are fundamentally impaired.
4. Set a minimum market capitalization of $500 million for adequate liquidity. Small and micro-cap stocks can show misleading momentum due to thin trading, and value metrics can be unreliable for very small companies.
5. Optionally add a dividend yield filter above 1% to further tilt toward stocks returning cash to shareholders, which provides downside protection while you wait for the value to be realized.

Interpreting Results

The dual-factor screen will produce a more concentrated list than either a pure value or pure momentum screen alone. This is by design — you are looking for the overlap, which is a smaller universe. Expect to see names across sectors, often in cyclical industries, financials, and industrials where valuations fluctuate and momentum shifts are common.

Rank your results by a blended score that weights both value and momentum equally. A stock that is extremely cheap but barely positive on momentum may deserve the same ranking as one that is modestly cheap but surging higher. The best candidates score well on both dimensions. Also investigate the catalyst — what changed to start the momentum? An earnings beat, management change, or industry tailwind are all constructive catalysts that support the thesis.

Common Pitfalls

• Letting one factor dominate: The power of this approach comes from the intersection of both factors. If you relax the value criteria too much, you end up with a momentum screen. If you relax momentum too much, you have a value screen with no catalyst. Both components must be meaningfully present.
• Momentum mean reversion: Short-term momentum (under 1 month) tends to reverse rather than persist. Use intermediate-term momentum (3-12 months) for the most reliable signals. The academic evidence strongly supports this time frame for the momentum factor.
• Sector concentration: Combined screens can cluster in sectors experiencing simultaneous re-rating. If all your results are in energy or financials, you are making a sector bet rather than a diversified factor bet. Cap sector exposure at 25-30% of the portfolio.
• Rebalancing too infrequently: Momentum is a time-sensitive factor. A stock that had strong momentum three months ago may have stalled or reversed. Rescreen monthly or at least quarterly to keep your portfolio aligned with the current opportunity set. Stale momentum signals degrade quickly.

Screen Now

Ready to find cheap stocks with positive momentum? Use our screener to combine value and momentum factors:

• Start with the Value Screener Preset then sort by recent performance to identify the cheapest stocks that are starting to trend higher — the sweet spot for value-momentum investing.