5 Stocks Show Value, Momentum
Posted: August 30, 2016
Stocks that are going up tend to keep going up.
Quite a few academic and professional studies have shown that, although there’s debate about whether investors can exploit the effect without running up their trading costs too much.
Momentum investing is probably the third-most popular school of investing, after growth (choosing stocks of companies with rapidly increasing earnings) and value (stocks selling below some reasonable estimate of intrinsic value).
I’m a value guy, as anyone knows who’s read this column during the past 19 years. But recognizing that many folks want to see some momentum, I usually devote two columns a year to stocks that possess both value and momentum.
Scorecard
This column you’re reading is the 29th in that series. The average 12-month return on my recommendations on the 27 columns that have a one-year history has been 15.87 percent. That compares quite favorably with the average return on the S&P 500 for the same periods, which has been 7.70 percent.
Seventeen of the 27 columns beat the S&P, and 20 showed a profit.
Bear in mind that results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future results.
Last year, my selections rose 10.8 percent but trailed the S&P’s 18.93 percent return. Moderate losses in Alaska Air Group Inc. (ALK) and Cooper Tire & Rubber Co. (CTB) pulled down the return.
Here are five new picks that show both value and momentum.
Cisco Systems
With a market value of $157 billion, Cisco Systems Inc. (CSCO) is the ninth-largest technology company in the United States, trailing such giants as Apple and Microsoft. Computer networking has always been its forte. These days it also sells servers, web-security products and technical support services.
Cisco’s growth, once rapid, has slowed. For that reason its stock sells for only 15 times recent earnings (13 times next year’s estimates). But the company is still quite profitable, with a 22 percent profit margin. The stock has risen about 19 percent in the past six months.
Baxter International
Baxter International Inc. (BAX), based in Deerfield, Ill., makes kidney dialysis machines, other products to treat kidney disease, and a variety of hospital supplies. The stock is up close to 20 percent in the past six months, yet sells for less than six times the past four quarters’ earnings.
The low valuation is partly an anomaly. Earnings spiked recent because of the sale of Baxter’s Baxalta unit (which specialized in treatments for rare diseases). But there are some lasting benefits from the sale. Baxter now has debt of only 37 percent of stockholders’ equity — the lowest it’s been in many years.
Sanmina
Sanmina Corp. (SANM) is up 27 percent in six months. Even after that rise, it sells for a paltry five times earnings because its industry has often been characterized by cutthroat competition and low profit margins.
Based in San Jose, Calif., Sanmina manufactures circuit boards and other electronic assemblies for customers in the technology, defense, automotive and other industries. Its largest customer in 2015 was Alcatel. Sales to the 10 largest customers account for about half of revenue.
Earnings will continue to bounce around, but at its present price I think the stock’s a bargain.
Amerisafe
Based in DeRidder, La., Amerisafe Inc. (AMSF) writes workers’ compensation insurance policies. That’s another tough business, but Amerisafe has shown a profit 10 years in a row and is having a good year this year.
The stock is up about 14 percent in the past six months and sells for 14 times earnings. The company is small, with annual revenue around $400 million, and therefore is covered by only four analysts. Three of the four rate it a buy.
Formula Systems
Shares of the Israeli company Formula Systems Ltd. (FORTY) have shot up 36 percent in the past six months, but the stock is still valued at only eight times earnings. The company, with headquarters in Or Yehuda, Israel, installs and troubleshoots companies’ computer systems and software.
In January, Formula Systems acquired 50 percent of TSG, a small company specializing in military electronic and cybersecurity, and investors seem pleased with that step. Formula Systems itself is small, with 2015 sales of $750 million. As with Sanmina, earnings are volatile. But the company has shown a profit
Disclosure: I own shares in Formula Systems for a few clients. I own Alaska Air Group for most of my clients and personally. Recently, I sold Cooper Tire but owned it (for clients and personally) for much of the past year.