Diamondback Energy and Miller Industries Show Value and Momentum
Posted: July 29, 2024
July 22, 2024 (Maple Hill Syndicate) – For the 12 months through June 30, momentum stocks (those with rapidly rising prices) gained about 58%.
Value stocks (those selling at cheap prices relative to the companies’ earnings or net worth) advanced about 15%. So momentum stocks did almost four times as well as value stocks.
I’m a believer in value, and I expect it to stage a comeback. Nonetheless, I think it makes sense to seek out stocks that have both value and momentum characteristics.
For this article, I’ll define a value stock as one selling for no more than 15 times the company’s earnings per share. I’ll define a momentum stock as one that increased in price by 25% or more in the first half of this year.
Here are four stocks that can jump both of those hurdles.
Diamondback Energy
The Permian Basin in west Texas and eastern New Mexico has long been – and still is – one of the lowest-cost areas in the world to find oil and natural gas. That’s where Diamondback Energy Inc. (FANG) has most of its wells.
The oil industry hit a deep slump in 2014-2020, and Diamondback suffered three loss years. Since then it has notched good profits. The stock rose just over 29% in the first half, and sells for less than 12 times earnings. The median price/earnings multiple these days is about 24.
Miller Industries
Miller Industries Inc. (MLR) primarily makes tow trucks. You might not think that would be a growth niche, but Miller has increased its earnings by an average of 11% per year over the past decade. The stock climbed 30% in the first half, and sells for less than 10 times earnings.
As a small stock, Miller is almost completely neglected by Wall Street firms. Only one analyst follows it (and rates it a buy). That’s not a bad thing, as some academic studies suggest that stocks with scanty analyst coverage tend to outperform the market.
I’ve owned Miller shares in the past, and am considering a return engagement. My main hesitancy is that my clients’ portfolios are already heavy in industrial stocks.
Bel Fuse
Bel Fuse Inc. (BELFA), with headquarters in West Orange, New Jersey, originally made fuses for cars. Now, having grown through 16 acquisitions, it makes a wide variety of electronic components. Among its customers are Apple Inc., Xerox Holdings Corp. and Advanced Micro Devices Inc.
In the past three years, the stock has soared 530%, including a 25% gain in this year’s first half. It isn’t exorbitantly priced, selling for 1.5 times revenue and 12 times recent earnings.
Macatawa Bank
The smallest stock I’ll recommend today is Macatawa Bank Corp. (MCBC), based in Holland, Michigan. It advanced 29% in the first half and sells for 12 times earnings.
When evaluating banks, the first thing I look for is a return on assets of 1.0% or better. At Macatawa it’s 1.53%. I also prefer low debt, and Macatawa has debt equal to only 7% of its corporate net worth.
I like little banks for two reasons. First, I think the Federal Reserve will lower short-term interest rates soon, which should help banks because they “borrow short and lend long.” Second, the banking industry is in a long-term trend of consolidation, so small banks are takeover candidates.
The Record
This is the 45th column I’ve written about stocks that possess both value and momentum. The average gain on my selections in this series has been 13.0%, which compares favorably with 10.5% for the Standard & Poor’s 500 Total Return Index.
Those figures are based on the 43 columns for which one-year returns can be calculated. Thirty of the 43 columns were profitable and 23 beat the index.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
The results from a year ago were much better. My “value plus momentum” picks from last August rose 48.2%, roundly beating the index’s 28.3%.
The best gainer was Modine Manufacturing Co. (MOD), a maker of air conditioning equipment. It rose 130%.
Ironically, my worst performer was a company that got acquired. Earthstone Energy Inc. was bought by Permian Resources Corp., but at only a small premium. It advanced 8% through the November takeover.
In between were Alpha Metallurgical Resources Inc. (AMR) with a 48% return, Paccar Inc. (PCAR) with 26% and American Woodmark Corp. (AMWD) at 18%.
Disclosure: Figures and ratios in this column are as of July 12. I own Diamondback Energy personally and for most of my clients.
John Dorfman is chairman of Dorfman Value Investments in Boston, Massachusetts. His firm or clients may own or trade the stocks discussed here. He can be reached at jdorfman@dorfmanvalue.com.