Strategy
Growth
Australia

ASX Momentum Strategy

15 Jun 2020
By
The ASX Momentum strategy works on the idea that stock prices that have risen significantly over the past, relative to their peers, tend to continue to outperform. This is known as the momentum effect and has been examined extensively in the academic literature. This strategy takes advantage of this effect by buying the top momentum stocks in the S&P/ASX 100 index.

Latest Update – 15 June 2020

Being the 15th of the month, it is time to rebalance the ASX Momentum strategy. As previously stated we have increased this to a ten-stock portfolio but members wishing to trade the original five stock version can continue to do so. After only holding a reduced number of stocks over recent months, for the month of June, the ASX Momentum strategy will be back to fully invested, as more that ten stocks qualify.

The below table shows the top ten ASX100 momentum stocks, based on our criteria of price momentum. For those members only trading the five stock portfolio, the top five stocks in the list should be held. We already hold Fortescue Metals Group (FMG) and Evolution Mining (EVN) from this list, meaning members are required to sell A2M Milk (A2M) and Ausnet Services (AST) and buy Afterpay (APT), Domino’s Pizza Enterprises (DMP), and Northern Star Resources (NST). 

For those holding the ten stock portfolio, Ausnet Services (AST) should be sold, while the following seven stocks bought; Afterpay (APT), Domino’s Pizza Enterprises (DMP), Northern Star Resources (NST), Ansell (ANN), JB Hi-Fi (JBH), Xero (XRO), and TPG Telecom (TPM).

As a reminder, this strategy rebalances on the 15th of each month (or the next business day if the 15th is a non-trading day). For specific details of closed trades, please see our closed trades page.

For historical trade updates please click here.

Stock codeStock nameRankQtyEntry dateEntry priceCurrent priceCurrent valueReturn percentage
A2M
The A2 Milk Company Limited Ordinary
8
31816 Mar 20$15.71$19.33$6,146.9423.04%
ANN
Ansell Limited Ordinary
6
14315 Jun 20$34.83$37.48$5,359.647.61%
APT
Afterpay Limited Ordinary
1
9615 Jun 20$51.86$68.16$6,543.3631.43%
DMP
Domino's Pizza Enterprises Limited Ordinary
3
7915 Jun 20$62.70$70.81$5,593.9912.93%
EVN
Evolution Mining Limited Ordinary
4
91518 May 20$5.46$6.00$5,490.009.89%
FMG
Fortescue Metals Group Ltd Ordinary
2
41418 May 20$12.05$14.03$5,808.4216.43%
JBH
JB HI-FI Limited Ordinary
7
12515 Jun 20$40.00$42.70$5,337.506.75%
NST
Northern Star Resources Ltd Ordinary
5
36415 Jun 20$13.70$14.22$5,176.083.80%
TPM
TPG Telecom Limited Ordinary
10
60915 Jun 20$8.20$8.93$5,438.378.90%
XRO
Xero Limited Ordinary
9
5915 Jun 20$83.77$91.80$5,416.209.59%

*Quantities are based on investing $5,000 per stock on the entry date

ASX Momentum Strategy

The ASX 100 index contains the largest 100 companies listed in Australia and therefore provides an excellent pool to find large capitalisation stocks that may exhibit the momentum effect. By searching this universe for stocks that have risen the most over the prior 6 to 12 months, we are banking on the previous momentum persisting for a good proportion of the chosen stocks.

Of course, not all trades will be winners, but according to the back-testing, the strategy closes 54.5% of trades with a profit and produces an average return of 17.9% for these trades. On the other side, the average loss per losing trade is only -6.8%. These statistics show why the strategy can produce a market-beating return over the long term, but they also show that it only works when an investor buys the entire portfolio. Picking and choosing individual stocks from this table has a reasonable probability of selecting a losing trade. Similarly, adjusting the portfolio when the strategy re-balances each month is essential to make sure you hold the optimal portfolio of stocks.

How To Follow This Strategy

Rivkin’s strategies are designed to be as easy as possible for investors to follow. To follow the ASX Momentum strategy, investors need to buy the stocks in the above table in equal weights. Weights can drift over time as stock prices move, but we only recommend re-balancing stock weights if they stray too far from the target weight (20% per stock). The stock volumes shown in this table are based on a $5,000 investment per stock which produces a $25,000 portfolio.

Once per month, the list of stocks will be updated in what we call a ‘re-balance’. This means investors will need to look at the new list and sell any stocks that are no longer on the list. After these stocks are sold, the new stocks from the current table can be bought.

About The Strategy

The ASX Momentum strategy was developed by Rivkin during 2015 and was rolled out as a strategy to clients in May 2016. Extensive back-testing was done to create and refine the strategy, and it is this back-testing that we rely on to give us increased confidence about future expectations. Please click here to find out more about the strategy.

Rivkin does not ever provide financial advice. Please consider your own circumstances before purchasing any of our products or acting on our general advice, for any Rivkin product or recommendation.

SHOW COMMENTS / QUESTIONS (6)

6
Comments

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John G.

I do like the AfterPay (APT) business model, but I am worried about bad debts in the current climate. Their customers are not the high income earners. The new fridge bought by an unemployed person, is no security for the loan. (By the time it is repossessed and sold at a giveaway price, half or all the loan value is lost.) Unfortunately, we are not heading for prosperity. I am concerned, that people in desperate need will use APT and bad debt provisions will balloon. How do you view APT’s future and in particular their bad debt risk?
Regards,
John G
NSW

Shannon Rivkin

Hi John,
I think that’s a reasonable concern, but APT has shown good evidence recently that its customers aren’t having problems with APT debts and that the process is being managed well. This could worsen obviously, but APT’s processes look sound so far. Additionally, to some degree, I’m not that concerned as the bad debt cycle won’t be too long and the flipside of this environment is the increased spending online and APT is benefiting greatly from that accelerated shift.

The stock is not cheap however but the future potential remains very exciting.

Regards,
Shannon Rivkin

Fred M.

With the current trade situation between China/ Australia and FMG entry to the momentum strategy, what could happen to the price of FMG if China cuts back on iron ore imports from Australia? Fred M

Shannon Rivkin

Hi Fred,
That is a possibility but a remote one in our view. China relies almost entirely on Australia and Brazil for its iron ore supply (compared to coal which it is almost self-sufficient), and with Brazil’s coronavirus numbers worsening significantly Australia’s iron ore supply is vital if China is going to try to stimulate the economy with infrastructure spending.
Regards,
Shannon Rivkin

Paul K.

I notice the lack of the “next” five in the momentum portfolio?

William O.

Hi Paul,
We are actually close to changing the ASX Momentum strategy to include 10 stocks rather than 5 to bring it in line with the other strategies. We will put out some member communications in the next week or two and then implement the change at the next rebalance date (15 December).
Regards,
William

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