The investment universe has as many styles as investors have preferences. Some are risk-averse and look for long-term value while some choose to ride high on the latest fad and benefit from growth over the short-term. Then there are investors who get the best of both worlds.
Lots of stock picks out there promise great value. However, value stocks tend to exhibit steady growth and movement in price. If one invests in undervalued stocks, one has to wait for other buyers to come in so that the stock price can go up. But few are willing to wait for it.
A parallel universe away from the somber and careful value investors, are the carefree and free-spirited momentum traders. These investors basically employ an investment strategy that seeks to take advantage of market volatility.
So, what if there was a way to keep both of these crowds happy with stocks possessing great momentum and good value?
Value and Momentum Combined Potential
Value and momentum investing rarely go hand in hand, considering these two strategies have far more disparities than similarities. However, if combined with care, they can effectively complement each other and actually increase the risk-adjusted returns of your portfolio.
Value investing offers an opportunity to enter the market and grab stocks that have otherwise been overlooked by a majority of investors and are trading cheap. On the other hand, momentum investors take short-term resort in stocks that are scaling up and tend to sell them as soon as they show signs of a downtrend. The basic idea that prevails among momentum investors is that once a trend is recognized, it is more likely to retain that direction than to move against the flow.
Investors should therefore look to benefit from this hybrid investing approach, targeting investments that appear both undervalued and have by now witnessed a recent trend of market gains.
5 Value Picks Gaining Momentum
With the help of our new style score system, we have identified five stocks that look great from both the Momentum and the Value standpoint.
Our Value Style Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount. Meanwhile, the Momentum component provides the temperature gauge that indicates when to enter or exit the space.
Back-tested results show that stocks with Style Scores of ‘A’ or ‘B,’ when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) handily outperform other stocks.
Atlas Air Worldwide Holdings, Inc. AAWW
The company is principally involved in the airport-to-airport air transportation of heavy freight cargo through its two operating subsidiary airlines, Atlas Air, Inc. and Polar Air Cargo, Inc.
Atlas Air Worldwide has a Zacks Rank #1. Moreover, it carries a Value Style Score of ‘A’ and a Momentum Style Score of ‘B.’
Year-to-date, the stock has returned 19.9%, significantly outpacing the benchmark S&P 500 return of a little over 3.0%.
Atlas Air Worldwide possesses a P/E of 11.78x, a massive discount of 39.3% over the peer group average of 19.41x. Further, the stock has been trading above the 200-days moving average since Oct 24, 2014 barring minor fluctuations and above the 50-days moving average since Apr 29, 2015. The widening gap between the stock price line and that of 50 and 200-days moving average lines reflect the growing momentum of Atlas Air Worldwide.
Moreover, over the last four quarters, the company has delivered an impressive average positive earnings surprise of 40.87%. For the current quarter, four earnings estimates at Atlas Air Worldwide have moved higher compared to zero downward revisions over the past 30 days.
The trend has been pretty favorable, too, with estimates increasing from 66 cents a share 30 days ago, to $1.09 today – a rise of 65.2%. Moreover, for full year 2015, EPS is projected to grow 29.09% and revenues by 5.0%.
American Equity Investment Life Holding Co. AEL
The company is a full-service underwriter of a broad line of annuity and insurance products, with a primary emphasis on the sale of fixed rate and index annuities.
American Equity Investment has a Zacks Rank #1. Besides, it carries a Value and Momentum Style Score of ‘A.’
The company possesses a P/E of 10.34x and P/S of 0.92, a discount of 13.5% and 13.2% over the industry average of 11.95x and 1.06, respectively. The company has a Return On Equity (ROE) of 9.7%, a premium of 18.3% over the industry ROE of 8.2%.
Over the last four quarters, the company has delivered an impressive average positive earnings surprise of 21.84%. In fact, the company has also been enjoying solid earnings estimate revisions. Over the past month, current quarter estimates have increased from 58 cents to 60 cents per share. Moreover, for full year 2015, EPS is expected to grow 2.82% and revenues by 4.6%.
American Eagle Outfitters, Inc. AEO
The company is a specialty retailer of all-American casual apparel, accessories and footwear for men and women 16 to 34. American Eagle Outfitters sources, designs and markets a versatile line of timeless and relaxed clothing classics like jeans, khakis and T-shirts.
American Eagle Outfitters has a Zacks Rank #1. Also, it carries a Value and Momentum Style Score of ‘A.’
Year-to-date, the stock has returned 18.4%, significantly outpacing the benchmark S&P 500 return of a little over 3.0%.
The company has a P/E of 17.04x, a significant discount of 12.2% over the peer group average of 19.40x. Further, the stock has been trading above the 200-day moving average since Dec 9, 2014.
The company has outpaced the Zacks Consensus Estimate in the three of the trailing four quarters, with an average earnings beat of 14.08%. American Eagle Outfitters has also been witnessing solid earnings estimate revision activity lately, which has helped boost the current quarter’s Zacks Consensus Estimate by 40.0% to 14 cents, over the past month. Moreover, for full year 2015, EPS is estimated to grow a massive 50.8% and revenues by 5.0%.
NeuStar, Inc. NSR
The company provides essential clearinghouse services to the North American communications industry and Internet service providers around the world.
NeuStar has a Zacks Rank #1. Moreover, it carries a Value and Momentum Style Score of ‘A.’
With a P/E of 6.72x and a P/S of 1.50, the company is trading at a massive discount of 6.8% and 25.4 over the peer group average of 17.57x and 2.01, respectively. Moreover, the company has a ROE of 38.1%, a massive premium of 184.3% over the industry ROE of 13.4%.
The company has delivered an average earnings beat of 13.80% over the last four quarters. In fact, for the current quarter, three earnings estimates at NeuStar have moved higher compared to zero downward revisions over the past 30 days.
The trend has been pretty favorable for this stock, too, with estimates increasing from 92 cents a share 30 days ago, to 96 cents today – a rise of 4.3%. Further, for full year 2015, EPS is estimated to grow at a 10.61% and revenues at 7.1%.
Trinseo SA TSE
This global materials company and manufacturer of plastics, latex and rubber operates through four segments: Latex, Synthetic Rubber, Performance Plastics, and Basic Plastics and Feedstocks.
Trinseo has a Zacks Rank #1. In addition, it carries a Value and Momentum Style Score of ‘A.’
Year-to-date, the stock has returned a massive 67.1%, significantly outpacing the benchmark S&P 500 return of a little over 3.0%.
The company possesses a P/E of 7.05x and P/S of 0.30, a huge discount of 53.6% and 55.9% over the industry average of 15.20x and 0.68, respectively. Further, the stock has been trading above the 50-days moving average since Feb 2, 2015.
Trinseo has also been witnessing solid earnings estimate revision activity lately, which has helped boost the current quarter Zacks Consensus Estimate by a whopping 214% to $1.57, over the past month.
The Bottom Line
Winning the best of both worlds is a rare and tempting privilege. So, it might not be a bad idea to invest in these undervalued gems for the time being, that are riding the high tide, banking on the Zacks' style score system. As the saying goes, one should make hay while the sun shines.
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