NEW YORK ( MagicDiligence.com) -- Price momentum as a stock performance predictor is often scoffed at by fundamental value investors and "efficient market" academics.Momentum, they will tell you, has nothing to do with the fundamental factors that drive growth in revenue, profits and book value -- the ultimate factors that determine the value of a business and, hence, the price of a stock. No less an authority than Warren Buffett has said that past prices are only good at predicting past returns! Many value investors even believe that the stocks that have been the most beaten down make the best investments because the stock price is logically closer to the bottom. On the other hand, there are armies of technically oriented traders that use nothing except than price charts to make investment decisions! So who is correct? Believe it or not, there is pretty convincing research that price momentum does make a difference over a 1-year investment horizon, the period targeted by Magic Formula Investing (MFI). The most convincing study can be found in James O'Shaughnessy's book What Works on Wall Street (the Kindle version costs less than $6), in which the author back-tests a number of mechanical investing strategies over a 42-year period, rebalancing annually. O'Shaughnessy's study confirmed some things that we already believe. Stocks with low valuations -- low price-to-earnings ratios, low price-to-cash flow ratios, low price-to-book ratios and low price-to-sales ratios -- outperformed the S&P 500 over his sample period. Stocks with the inverse (high P/E, etc.) all underperformed the market. Additionally, O'Shaughnessy found that stocks with high returns on equity (ROE) also trounced the S&P, giving further support to the MFI strategy, which focuses solely on high earnings yields (equivalent to low P/E) and high returns on capital (i.e., high ROE). What was more surprising were his findings on price momentum, defined in the book as high trailing 12-month stock price appreciation. The stocks with the best price momentum greatly outperformed the market, although they did so with high volatility. On the other hand, buying the stocks with the worst price momentum was a sure path to disaster. It was the worst performing mechanical strategy, returning just 3.3% on a compounded annual basis vs. the S&P's 11.51%.