The famous story of the race between a rabbit and a tortoise ends with the moral: "Slow and steady wins the race". Now, if we equate the rabbit with momentum and the tortoise with value and twist the tale a bit, we get a slightly different albeit an extremely relevant modern version.
In this version, they have to cross a river before reaching the finishing line. The contestants realized that if they worked together, they would be able to cover the path, faster and more efficiently. The rabbit carried the tortoise on land and vice versa while crossing the river.
So despite being brilliant individually and with strong core competencies, it is better to work in a team and harness each other's core competencies. This lesson can be applied to the stock market.
Let’s see how.
Value and Momentum Combined Potential
Buy cheap stocks or chase the trend — two contradictory (and often exact opposite) strategies that have delivered excellent results throughout market history. Momentum, when it is working well, can be the star of your portfolio for years. However, when it’s not working, it can lead to atrocious results relative to the market.
Value, which is considered the steadier one, too undergoes periods of major underperformance. So it might be a good idea to combine these two by looking for cheap stocks that the market is just starting to become aware of.
If done with care, these two strategies can effectively complement each other and increase the risk-adjusted returns of your portfolio.
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.
The Tech Sector
The Silicon Valley tech cup seems to be overflowing! Job growth is steady, innovation is all around and so is positivity.
The San Jose Mercury News' ranking of the biggest companies in Silicon Valley based on revenues — the SV 150 —, confirms that the region has been nothing short of a cash machine. In the SV 150’s 29 years’ run, 2014 was the most profitable year with 23.8% increase in overall profits, 11.7% growth in sales and 7.1% increase in job growth.
So as consumer spending continues to be stimulated by a strong jobs market, lower interest rates, a stronger U.S. dollar and cheaper fuel, the bull market run might continue in 2015 as well. In fact, Bill Greiner, chief investment officer for Mariner Holdings, is of the opinion that the bull market will run for another 6 years. We also expect the tech stocks to be a major driver of this trend.
With so much positivity, it is important to not go overboard. Investors have to make sure that they do not end up overpaying for the stocks while making sure that they do not miss out on the positive trends either.
5 Value Picks with 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, in the computer and tech sector.
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 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.
Fabrinet FN
Zacks Rank #1 (Strong Buy)
Value Style Score – ‘A’
Momentum Style Score – ‘A’
Headquartered in George Town, the Cayman Islands, Fabrinet provides precision optical, electro-mechanical and electronic manufacturing services to original equipment manufacturers of complex products, such as optical communication components, modules and sub-systems, industrial lasers and sensors.
Right now, Fabrinet has a forward P/E of just 14.06x. Compared with the industry this is quite favorable as the overall space has an average P/E of 17.30x in comparison.
The stock has also been enjoying positive estimate revisions over the past 60 days, which has caused the Zacks Consensus Estimate to climb 6.8% to its current level of $1.41 a share for the current year.
ePlus inc. PLUS
Zacks Rank #2 (Buy)
Value Style Score – ‘A’
Momentum Style Score – ‘A’
ePlus through its subsidiaries provides information technology (IT) products and services, flexible leasing and financing solutions, and enterprise supply management in the United States. It is headquartered in Herndon, VA
Right now, ePlus has a forward P/E of just 12.90x. Compared with the industry at large this is pretty favorable as the overall space has an average P/E of a whopping 495.60x.
The company has delivered an average earnings beat of 11.32% over the last four quarters.
The trend has been favorable for this stock too, as it has been enjoying positive estimate revisions over the same time frame, which has caused the Zacks Consensus Estimate to climb 0.66% to its current level of $6.09 a share for the current year.
Apple Inc. AAPL
Zacks Rank #2 (Buy)
Value Style Score – ‘A’
Momentum Style Score – ‘B’
This tech giant needs no introduction.
Right now, Apple has a forward P/E of just 14.23x, which means that investors are paying $14.23 for each dollar in expected Apple’s earnings this year. Compared with the industry at large this is pretty favorable as the overall space has an average P/E of 28.60x.
The stock has also been enjoying positive estimate revisions over the past 60 days, which has caused the Zacks Consensus Estimate to climb 3.6% to its current level of $9.01 a share for the current year.
The company has outpaced the Zacks Consensus Estimate in all the four trailing quarters, with an average earnings beat of 9.56%.
Teradyne Inc. TER
Zacks Rank #2 (Buy)
Value Style Score – ‘B’
Momentum Style Score – ‘B’
Headquartered in North Reading, MA, Teradyne provides automatic test equipment worldwide.
Right now, Teradyne has a forward P/E of just 17.53x. Compared to the industry at large this is pretty favorable as the overall space has an average P/E of 25.00x.
The stock has also been enjoying positive estimate revisions over the same time period, which has caused the Zacks Consensus Estimate to climb 16.16% to its current level of $1.15 a share for the current year.
The company has outpaced the Zacks Consensus Estimate in all the trailing four quarters, with an average earnings beat of 25.01%.
ClearOne, Inc. CLRO
Zacks Rank #2 (Buy)
Value Style Score – ‘B’
Momentum Style Score – ‘B’
ClearOne together with its subsidiaries, designs, develops and sells conferencing, collaboration, streaming, and digital signage solutions for audio/voice and visual communications in the United States and internationally. It is headquartered in Salt Lake City, Utah.
Currently, ClearOne has a forward P/E of just 16.03x. Compared to the industry at large this is pretty favorable as the overall space has an average P/E of a whopping 81.20x.
The company has delivered an average earnings beat of 24.48% over the last four quarters.
The trend has been pretty favorable for this stock, too, as it has been enjoying positive estimate revisions over the past 60 days, which has caused the Zacks Consensus Estimate to climb 1.19% to its current level of 85 cents a share for the current year.
Conclusion
It is not always that we get the double-treat in everything in life. Using the Zacks Style Scores perhaps we’ve found a way to find stocks that look great from a Momentum and Value standpoint, that too in a buzzing sector.
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