We exited April 30's post "Goldman Sachs finds individual investors are piling into leveraged semiconductor ETFs" saying:
Now, as a general rule, the momo mamas aren't wrong to be enamored with momentum.
Of all the critters in the factor zoo (Fama-French 5 factor+momo) the momentum factor is the one most likely to put food on the table and cash in the bank. However! Trend>Friend>Bend>End means you are going to be trading which means you are going to have fees and slippage grinding against you.
Furthermore, using a triple-leveraged vehicle implies you had better be manipulating the market to get the timing of the turns correct. Otherwise just the variance will wipe you out, leaving aside whether you are right or wrong on the directional moves.
Because of that bend at the end you have to exit the position or ride it down. If you exit you run into the costs and timing problems mentioned in the outro. So do you ride the downturn?
Only, and I mean only, if the underlying company is high quality.
As an example, one of the small-modular-reactor stocks, Oklo, ran from around $25 in April 2025 to its all-time-high, $193.84 on October 14, 2025.
The thing was, the company wasn't a business. It might become one, it shows promise but it has never sold a single nuke plant. On November 10, 2025 we posted "Will General Electric's New Canadian Nuclear Reactor Doom Oklo to Irrelevance?" (GEV) with the snarky little intro:
There is something to be said for actually having a product.
and more importantly, this outro:
....As noted introducing June 27's "Trump plans executive orders to power AI growth in race with China" (PWR; GEV; CCJ):
I think we're positioned correctly with the Quanta, GE Vernova, Cameco etc.
But until sales, earnings, and cash flow catch up to the news, valuations are getting stretched.
But at least we have sales, earnings, and cash flow should the overall market tumble.
Money coming in the front door is comforting and a cushion against impulsivity, regret and all the other things that get in the way of big gains.
And as mentioned exiting May 23's ""Trump plots ‘Manhattan Project 2’ in nuclear power push" (CCJ; GEV)":
The "set it and forget it" stocks are in the headline, Cameco among the miners and GE Vernova among the nuke reactor manufacturers.
However, as is so often the case the speculative lottery tickets are seeing a lot of enthusiasm for their shares. The problem with them as investments are 1) a lack of stuff like sales/earnings/cash flow and 2) our conviction that we will see at least one and possibly three bear markets before they have products.
And in bear markets it is the companies lacking in sales/earnings/cash flow that get hit hardest; as investors begin to question whether they may have made a big mistake.
Addendum: I should have mentioned that with Cameco you also get 49% of nuke plant company Westinghouse. Brookfield owns the 51%.
Today OKLO is changing hands at $67.56USD down $2.10 in late pre-market trade.
The point isn't that we posted less than a month after the all-time high, that was lucky, but that shareholders got nervous/scared thinking about what they actually owned.
That 65% drop occurred as the rest of the market was, in fits and stars, moving higher.
Imagine if the overall market had gone into a sustained decline! OKLO would have hit single digits.
With that much-longer-than-usual introduction here's the headline story from the Financial Analysts Journal, Published online: 18 Mar 2019:
Abstract
Unlike standard factors, such as value, momentum, and size, “quality” lacks a commonly accepted definition. Practitioners, however, are increasingly gravitating to this style factor. They define quality to be various signals or combinations of signals—some that have been thoroughly explored in the academic literature and others that have received limited attention. Among a comprehensive group of the quality categories used by practitioners, we find that profitability, accounting quality, payout/dilution, and investment tend to be associated with a return premium whereas capital structure, earnings stability, and growth in profitability show little evidence of a premium. Profitability and investment-related characteristics tend to capture most of the quality return premium.
“Quality” as a factor in equity investing is a collection of metrics designed to capture the indicators of higher-quality financials in companies. Quality metrics are popular in the practitioner investment community, but no standard definition for the quality factor has been agreed on. In contrast, factors such as value and size have clear and accepted definitions. Although an extensive literature is dedicated to a few specific facets of quality, certain facets used in practitioner definitions have been only minimally explored in the academic literature.
As with the conventional factors, such as value and size, quality has been widely adopted as a target for factor indexes. In the 2010s, MSCI, FTSE Russell, Standard & Poor’s, Research Affiliates, EDHEC, and Deutsche Bank, among others, have created smart beta indexes based on some quality factor. Moreover, they typically include quality as an element of their multifactor offerings. In conversations with investors, the quality factor is pitched by index providers as an independent source of return and as a source of diversification because of its supposedly low correlation with the value factor.
The challenge for researchers is that the quality factor is constructed differently from other factors. The value and low-beta factors, for example, are created from a particular stock characteristic (or a set of highly related stock characteristics) to capture a risk premium associated with an undiversifiable economic risk or to capture an anomalous return associated with a persistent investor behavioral bias. For example, the value factor is generally ascribed to stocks that have a high book-to-price ratio, high earnings-to-price ratio, high dividend-to-price ratio, or some combination of these three valuation measures. The portfolio resulting from construction based on one or more of these definitions owns low-valuation stocks.
In contrast, quality factor portfolios are constructed differently by the various providers. One provider might tag a stock as high quality if it has a high score on some combination of the following attributes: earnings growth, earnings growth stability, low return volatility, high profitability, high return on assets, low debt ratio, and accruals-related accounting quality. Because the quality label is vague, we assess in this article each of the quality definitions proposed by practitioners to determine which, if any, is a reliable source of return.
We begin by examining the definitions of quality implemented in various product offerings. We then examine various quality portfolios available in the marketplace to assess the risk of data mining and biases.Footnote1 Based on the criteria, we consider what are the reliable sources of return premiums.
Survey of Quality Metrics in Product Offerings
Several major index providers offer quality indexes for passive investing. In , we list the company characteristics used to construct six quality factor indexes offered by six providers. We consider these characteristics to be a means to compare the indexes. For example, the quality indexes that use gross profitability, ROE (return on equity), or ROA (return on assets) are seeking to proxy company profitability, whereas indexes that use debt-to-equity and debt-to-cash-flow ratios are seeking to proxy a corporation’s financial conservatism in its capital structure.
We can group the characteristics into seven categories used by product providers to define quality:
Profitability
Earnings stability
Capital structure
Growth
Accounting quality
Payout/dilution
Investment
The six quality product providers listed in use substantially different characteristics in their portfolio construction. For example, a highly profitable company does not necessarily have stable earnings or low leverage or exhibit fast growth. An examination of the existing literature does not find any research exploring how growth and accounting quality, combined with low debt, would capture a risk exposure or a persistent irrational unwillingness on the part of investors to own this desirable combination of company attributes. Nor could we find any work in the academic literature that claims these groups of variables might proxy for a common source of covariation.
To empirically study whether quality variables are homogeneous or heterogeneous, we examined the pairwise correlation of the excess returns produced by quality portfolios. The correlations reported in reveal a lack of similarity, indicating that the variables are not proxies for a common hidden factor.Footnote2 The suggestion is that these leading quality index products provide a collection of heterogeneous attributes linked by the theme of financial and accounting quality. No evidence exists that these variables proxy for a unique homogeneous source of risk or a single anomaly. Therefore, quality indexes are more appropriately interpreted as multifactor portfolios whose primary commonality is that they are constructed mostly from the less well-known and less vetted company characteristics.
Table 2. Correlation of Variables Used by Index Providers in Various Quality CategoriesNotes: ACCR = accruals; AG = asset growth; AT = asset turnover; CACCR = change in accruals; CP = cash flow profitability; DPS = dividends per share; DTIS = debt issuance; EQIS = equity issuance; GM = gross margins; NOA = net operating assets; NP = net payout;andTL = total leverage.Table A3 in Appendix A of the online supplemental material (available at www.tandfonline.com/doi/suppl/10.1080/0015198X.2019.1567194) provides a detailed view of the pairwise correlations of a larger list of variables....
....MUCH MORE
If one is so inclined. do check out their "Summary of Robustness Tests"
Possibly also of interest
September 2014 - Market Anomalies: Can You Combine Value and Momentum?
December 2014 -What a Long Strange Trip: From CAPM To Fama-French to Four (or more) Factor
February 2018 - Alice In Factorland: Can Momentum Investing Be Saved?—Arnott et al
See also:
- Improving on the Four-factor (beta, size, value, momentum) Asset Pricing Model
- "A new benchmark model for estimating expected stock returns"
- Fama-French Have A Come-to-Buffett Moment
- Rob Arnott's Research Affiliates: "Finding Smart Beta in the Factor Zoo"
- "Two centuries of trend following"
- "The Equation that Will Change Finance"
and many more. Use the 'search blog' box if interested.
