Favor Fresh or Stale Top-ranked Stocks?
Posted in Momentum Investing
August 31, 2009
A reader asked: “Do you know of any research on the notion of stale vs. fresh decile ranks? In other words, does a stock that has just entered the top decile for a ranking characteristic tend to outperform one ranked in the top decile for months?”
No research that addresses your question comes to mind. Such research would be relatively intricate, requiring large and long samples. Specifically, the deciles would have to be large enough (in terms of number of stocks in them) for further segmentation by time-in-decile.
A guess is that fresh entrants to extreme deciles may carry momentum with respect to the ranking characteristic (for example, earnings growth), perhaps making fresh entrants better bets based on average return than stale residents over intermediate horizons.
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