💵 The Low Priced Stocks Experiment

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Screening and filtering stock lists has been quite rewarding for us in 2023. Can 'low priced' momentum stocks run next?

I said it would be a stock pickers market this year and it certainly has been so far! The rally started in Europe back in October. The the US got going in earnest in January and hasn’t looked back since.

Sure the indices have done pretty well too, but single stocks this year have been...

One very obvious form of stock picking would've been to jumped on Nvidia (NVDA) and the AI narrative to earn anywhere up to a +129% ytd....

But NVDA weren't alone in impressing on the upside so far in 2023...

The extraordinary rebound in the fortunes of Meta Platforms (META) would probably have been the number one story in any other year. 

If we look down that list of S&P 500 gainers one thing stands out. Well several things stand out but one really stands out...

PRICE

Nearly all the stocks in that list have a 'high price' (we'll get to it).

The average price of an S&P 500 stock, as of Friday’s close was $187.67. 

Zoom in on the third best YTD performer, and you find that it’s Carnival (CCL)  which is priced at roughly 10% of the Index average at $18.49. 

Why is that interesting?

Because it turns out that low price is a quantitative factor.

The definition of “low price” in this context is being in the bottom decile or having a price that’s in the bottom 10% of prices in the Index as a whole.

Which is where Carnival sits. In fact CCL is the 15th lowest priced stock in the S&P 500 as of Fridays close.

In December 2022, however it would have been much closer to the bottom of the list. Since then of course the stock price has risen by 100%.

Quantastic

The quants at BofA published a note last week, looking at the regime that was in charge in the US market. They offered up a number of differing scenarios.

One of which is that the US could be in, or pricing in an early stage recovery. Which to my mind would be a likely scenario post a soft landing in 2024.

One of the BofA observations was that “Low Price” had outperformed in June, gaining + 9.6%, beating the S&P equal weight by +2%.

In fact, up until July 24th, it was almost doubling the performance of the equal weight version of the index, up by +6.20% vs +3.20%.

To quote the BofA quants 

All interesting, but my first thought was good luck trying to find a “low priced” info tech stock.

On closer inspection there are some, as we can see here...

The list includes Enphase Energy, up by almost 2800% over the last 5 years. The inclusion feels like curve fitting, as its only in the list by virtue of dropping -42% ytd.

Now I need to stress that the concept of low and high prices is to some extent arbitrary.

It says nothing about the underlying business, but against that, the general rule of thumb is that businesses that perform well, tend to see their stock prices rise, and if they perform well over the longer term, then price may continue to follow.

The reverse is also likely to be true. 

However cyclicality also plays a part. There may be under appreciated or mis-priced stocks languishing in that bottom 10% of stock prices. Stocks which can appreciate rapidly given the right catalysts, such as Carnival (CCL).

Those Bank of America comments & the list above got me thinking. Regular readers will know by now that I love a bit of digging. 

So the question in my mind...

As I don't see a hard landing as likely, is there any value in compiling a list of low priced stocks with recent upside momentum?

Time for an experiment and in the spirit of “if you build it they will come” I did just that.

First I drew up a list of the lowest 10% of stock prices in the S&P 500. I gave myself a little headroom with a list that had an extra few stocks for good measure.

Having created that list I applied a simple filter to screen for stocks that had had a better than average 1-month % performance versus the average performance among the lowest 10% priced stocks.

That hurdle was fairly low with a return of > than +5.20%

Here is the table of stocks that this selection process produced: 

The eagle eyed among you will notice that there is some crossover between stocks in this list and the S&P 500 left behind list from early June.

I took that to be a good omen.

The next thing I did was to look at some charts - applying a common template or mask to each of the stocks in the list.

In this case my earnings momentum template though I extended the time frame from 6 months out to 12.

Here are some examples of what I found:

I have conducted no qualitative research on the stocks in this list beyond the screens set out above.

However, over the comings days I will dig deeper and potentially condense down this list. Maybe there will be juice in this from the original low price screen of the S&P 500. 

I will keep you updated on my progress and that of the stocks within this universe.