5 Stocks With Improving Momentum and Good Valuation
A momentum investor buys only stocks that are “working”, with good charts and strong recent performance, at least relative to the other market. The game there is “the trend is my friend”.
On the other hand, there are investors who like to buy when a stock appears cheap, focusing on names the market crowd is avoiding. Another term for this approach is “contrarian”. The game here is regression to the mean, which is a fancy way of saying “the tide rises, the tide falls”.
Hopefully you can answer that first question! For me, the answer is both, at least to some degree. Pure momentum investors usually don’t care much about the fundamentals per se, as they are focused on price action and volume. Pure contrarians look at valuations and negative price action. Many investors find they’re best off combining both of these approaches.
Personally, though, I never chase stocks the same way aggressive momentum investors are willing to pursue them. I also don’t like to buy just on value unless I have some sort of signal from the charts that suggest I am not trying to catch a falling knife.
With all this in mind, I wanted to share a screen designed to identify stocks with some momentum (but not too much) and good valuation from my watchlist of 100 stocks. Before I go on, I should say that my watchlist is very broad, with many sectors and market caps as well as growth and value types of names represented. In the model portfolios I run, I hold about 30 of them presently.
For this exercise, I chose the following constraints:
- Market Cap: > $500mm (below $500mm in market capitalization might yield too many micro-caps. We want decently sized stocks here.)
- Trailing PE < 16
- 3-month Price Return > S&P 500 (2%)
- 12-month Price Return < S&P 500 (15%)
Here is what we get:
[click the image above to enlarge it]
Please remember: this list should not be taken as a recommendation; it’s just an illustration of one approach to screening. While I happen to own some of these in my model portfolios, you should do your own research and due diligence before investing in any stock.
With that in mind, let me run through each of these names. What’s nice about the list is that it spans many various sectors and market caps.
Allegiant (ALGT) is a travel company primarily focused on flying planes from small cities to resort destinations. Insiders own a substantial stake and customers love them for saving them time and money. I was in Las Vegas, their headquarters, this week and did my own spot-check of customers in the airport. I wouldn’t base my investment decision solely on this criterion, but evidence that your customers really like your service is usually not a bad thing.
ALGT has been strong over the long haul, but weak this year due to rapidly rising fuel costs that led them to cut capacity. While I own the stock in my Top 20 Model Portfolio, I actually reduced the position recently and am struggling with its long-term potential. On a positive note, they will soon be flying to Hawaii and have other exciting initiatives. Personally, I’ll probably hold it for now – with any luck, it may hit 60 a year from now based on 15 P/E and $4 per share earnings. (That’s the hope, anyhow.)
Intel (INTC) has bounced back lately but remains inexpensive. I own it in both the Top 20 model (though I have trimmed the position recently) as well as in Conservative Growth/Balanced, where it could be deemed more appropriate. You are probably more familiar with this stock. The dividend is nice – they just hiked it further this week too. I think the real concern is that they won’t adapt to a world less reliant on PCs, but I think that judgment is premature. I target 32 over the next year (13 PE), If they were to hit a 32 P/E and 32 over the the next year, that'd be great. This one is attractive to me given the blue-chip nature of the company.
Johnson & Johnson (JNJ) seems to finally be emerging from a bad run of luck as well as poor price performance that had left its stock unsustainably cheap. I just sold the stock in Top 20, but I continue to hold it in Conservative Growth/Balanced, where it is very appropriate in my view. JNJ is more of a medical device company than pharmaceutical or consumer products (two sectors where the problems have been primarily). I believe the dividend is likely to attract investors who sense the worst is now behind them. A decent target for them might be 86 a year from now, at a P/E of about 16.
I like Plexus (PLXS) for many reasons, but we sold the stock in Top 20 on this recent rally. The company is an outsourced manufacturer with global operations. While the valuation looks fair, I believe that many of its rivals, though not as fundamentally strong, are substantially cheaper. With that said, I would love to see this company go to 45.50 (at 14 P/E) in the coming year.
Zimmer (ZMH) is one that I have missed, but it may have more upside as it remains somewhat inexpensive in my view. There has been an industry issue for these manufacturers of hip and knee replacements due to regulatory scrutiny over their relationships with doctors. I believe that the Great Recession also temporarily delayed adoption, but it’s easy to imagine the company's potential in a graying nation (and world) that wants to stay physically active. I believe it would be reasonable to expect ZMH to trade at 16 P/E a year from now, and that would work out to about 87. Perhaps I should do some more work on this one!
Hopefully I've given you a few ideas to investigate further. In this case, we have looked for stocks that have good valuation and that are starting to show momentum. Remember, screening is a starting point as part of a more thorough investment process.
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator
Disclosure: Alan Brochstein is long ALGT, INTC and JNJ in model portfolios at Invest By Model at this writing.
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