It is commonly said that to win you have to risk loss. If you wish to get that extra bit, you may need to travel an extra mile. The same formula applies to the world of investments.
Investors who wish to benefit from growth over the short term may consider employing a momentum strategy to add substantial returns to their portfolios. However, keep in mind that this is a purely speculative strategy and is strictly not meant for the weak-hearted.
So, what if, along with some serious growth potential, we could also provide such investors with the security of long-term value in the form of low P/Es, generally high returns and solid outlooks?
Combined Toast of Momentum and Value
Value and momentum investing rarely go hand in hand, considering that these two investing strategies have far more disparities than similarities.
Momentum traders basically employ an investing strategy that seeks to capitalize on market volatility. Once a trend is recognized, they anticipate it to continue in the same direction ,backed by the momentum already behind it. On the other hand, value investors look for opportunities to enter the market and grab stocks that have otherwise been overlooked by a majority of investors, and are therefore trading cheap.
Notably, the current economic backdrop of continued strength in the U.S. dollar, coupled with oil price unpredictability, hints at substantial volatility and uncertainty in trading over the coming months. Hence, taking into account these economic fundamentals, investors should look to benefit from this hybrid investing approach, targeting investments which have by now witnessed a steady trend in market gains and appear undervalued at the same time.
3 Momentum Picks Possessing Value
With the help of our new style score system, we have identified three stocks that look great from both the Momentum and the Value standpoint.
The Zacks Momentum Style Score indicates when the timing is best to grab a stock and take advantage of its momentum with the highest probability of success. Meanwhile, the Value component 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.
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.
Flaunting a solid Zacks Rank, Momentum and Value Style Scores of ‘A,’ P/E (F1) of less than 20, and an average price change of more than 5% over the last four weeks, the following stocks appear to be good bets at the moment.
Isle of Capri Casinos, Inc. ISLE
The company is a developer, owner and operator of branded gaming and related lodging and entertainment facilities in growing markets in the U.S.
Isle of Capri Casinos currently carries a Zacks Rank #1 and has added value in excess of 22% over the last four weeks. The company possesses a P/E of 15.92x and P/S of 0.69x, a massive discount of 28.2% and 40.0% over the industry average of 22.18x and 1.15x, respectively. Also, the company has a Return on Equity (ROE) of 146.8% – a massive premium over the industry ROE of 11.6%.
Moreover, the company has been topping earnings expectations lately with the last four quarters averaging at 69.38%. In fact, not only does the stock have an impressive short-term thrust, it has seen solid activity on the earnings estimate revision front as well. Over the past month, current quarter estimates have increased from 10 cents to 16 cents per share, reflecting an improvement of 60%. Moreover, for full year 2015, EPS is expected to grow 43.9% and revenues by 3.4%.
Fabrinet FN
The company 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.
This Zacks Rank #1 stock has rallied more than 8% over the last four weeks and can be an intriguing choice for momentum investors right now. Further, with a P/E of 14.67x and a P/S of 1.01x, the company is trading at a discount of 22.5% and 7.3% over the peer group average of 18.92x and 1.09, respectively.
Moreover, 2015 and 2016 earnings estimates are trending up, suggesting further bullishness ahead. In fact, for full year 2015, EPS is expected to grow 2.2% and revenues by 12.7%.
Prudential Financial, Inc. PRU
The company is one of the largest financial services institutions in the U.S., providing a wide portfolio of insurance, investment management and other financial products and services.
The stock has gained nearly 7% over the last one month. Further, this Zacks Rank #2 stock possesses a P/E of 9.02x and P/S of 0.82x, a significant discount of 32.9% and 11.8% over the industry average of 13.45x and 0.93x, respectively.
Moreover, the company has a ROE of 10.5%, a premium of about 22.1% over the industry ROE of 8.6%. Also, in the last four quarters, the company has delivered an average positive earnings surprise of 0.53%. What’s more, for full year 2015, EPS is expected to grow 10.1%.
Take a Chance
So don’t hesitate to go that extra mile and invest in these undervalued gems that are riding the high tide. After all: no pain, no gain.
Investing in these stocks that possess a perfect blend of great momentum and good value might just do wonders for your portfolio. As when combined with care, these two contrasting strategies can effectively complement each other and can actually enhance risk-adjusted returns for your portfolio.
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