Focus on Data to Boost a Momentum Strategy

NEW YORK (TheStreet) -- Momentum has been the modus operandi in this market, prompted by a five-year bull run, an emergence from a recession, record low interest rates and quantitative easing. With the onset of tapering, threats of higher interest rates looming and massive gains since the 2009 market bottom, momentum will decline as a strategy. No longer will high-beta stocks be given a free pass after earnings misses. No longer will all stocks fly together, hitting new highs on a daily basis.

Fundamentals will begin to matter again. Stock picks will need to be right, not just ride along with the crowd. And sell-side analysts will no longer be applauded for upgrades that require very little useful information other than the fact that momentum is in play. This will separate investors who have outperformed by simply riding the trend vs. those who capitalize on both better data and momentum.

So which companies will have the edge? And how can we figure that out?

It's been more than five years since momentum has taken a backseat to analysis and stock-picking. Since that time, new laws have been created to strengthen the Chinese walls that are meant to separate analysts from those who pay their salaries. Typical sell-side analysts may make recommendations with good intentions, but as humans they are subject to influence by employers, companies and clients. With these inherent biases still present among analysts, their performance (or lack thereof), may become apparent when picking the right stocks becomes more important.

I turned to new technology and new financial start-ups in my search for a new, data-driven approach. And I came across a report from the Aite Group highlighting innovative financial technology startups for 2014.

Tangent Data Services is one such start-up. Tangent compiles and analyzes anonymous data on a large number of North American-based emails containing transactional information from more than 400 e-businesses, including Netflix (NFLX), Groupon  (GRPN), LinkedIn (LNKD), Amazon (AMZN), Vistaprint (VPRT) and OpenTable (OPEN).

Tangent's Founder and CEO Daniel Goldberg provided samples of data available prior to Q1 earnings. So as not to cherry pick, he allowed me to choose as many names as I wanted from all the companies he currently covers. I chose 10.

The data was impressive.

Below I have highlighted Netflix, Groupon and Vistaprint as examples. All three are household names with heavy institutional ownership. All moved dramatically after reporting earnings. The following charts show the quality of Tangent's data.

Tangent's data was perfectly correlated with the year-over-year percentage change in Netflix's actual domestic net streaming additions. This was in line with the consensus view, but impressive nonetheless.

Groupon, on the other hand, definitely shows the power of Tangent's proprietary data analysis. Groupon's gross billing data suggested a 14.3% year-over-year increase, while the consensus view suggested a 20% year-over-year rise. Groupon actually reported 14.7% year-over-year growth in gross billing -- and its stock dropped 21% the following day.

Then there's Vistaprint. Like with Groupon, Tangent's data suggested a different outcome than did the consensus view. Tangent's year-over-year sales growth data was much closer to the actual results than the Street consensus. After reporting earnings, Vistaprint dropped 24.8% the following day.

While Tangent data cannot account for all fundamental information essential to a company's relative performance, this kind of information is a great asset to analysts making recommendations. Unfortunately for sell-side analysts, Tangent only sells their data to the buy-side, keeping the information limited to an exclusive group of investment managers.

If data analytics services keep their information exclusive, then what is the future value of typical sell-side analysts?

The consequences to investment banks, which rely on sell-side research to help generate income, could be dire if they don't find their own way of producing this type of data analysis.

Whether the transition from momentum to value is a process of mean reversion, a healthy mid-cycle bull market, or a consequence of Fed intervention, the outcome will be the same. Fundamentals will matter again.

The question then becomes this: in the new age of big data and technological innovation, will companies like Tangent replace bureaucracy-bound sell-side analysts?

My guess is yes. The next phase of fundamental analysis will look nothing like what old Wall Street recognizes.

You can learn more about Tangent at www.tangentds.com.

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At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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