PulteGroup and Group 1 Automotive Show Value and Momentum
Posted: February 07, 2023
February 6, 2023 (Maple Hill Syndicate) – Just because a stock is cheap doesn’t mean it can’t get cheaper. That’s why some investors prefer stocks that show both value and momentum.
Twice a year I highlight a few such stocks in this column. Here are a few more. Each of these stocks has beaten the S&P 500 by at least ten percentage points over the past year, three months and year-to-date. And each one sells for 15 times earnings or less.
PulteGroup Inc. (PHM), based in Atlanta, is one of the largest homebuilding companies in the U.S., active in 23 states. The stock is up 27% year to date, yet sells for a bargain valuation near five times earnings.
Investors are scared of the homebuilders because a recession is widely predicted for this year. Homebuilding stocks have been murdered in some previous recessions. Other worries are rising mortgage rates and high home prices that put homes out of reach for many buyers.
That’s the bad news. The good news is that homebuilders can sell homes pretty much as quickly as they can complete them, and that those high home prices are good for homebuilder profits. Pulte scored a 32% return on stockholders’ equity last year. I consider anything over 15% good.
Group 1 Automotive Inc. (GPI) owns 203 car dealerships and 47 collision centers in the U.S. and United Kingdom. The company has posted a profit for 14 years straight. Last year was by far its best.
The stock is up 46% in the past year (through February 3) yet sells for a very modest five times earnings. Again, I believe that recession fears account for the low multiple. Group 1 did post a loss in the Great Recession year of 2008 but it cruised right through the Covid recession year of 2020.
Eleven Wall Street analysts follow Group 1, but only one of them rates it a “buy.” I wouldn’t go quite so far as Daniel Jones, a market commentator who calls the stock “criminally undervalued.” (Jones also owns the stock.) But I think the analysts are too pessimistic on this one.
Skyworks Solutions Inc. (SWKS), out of Irvine, California, produces semiconductor chips and related products used in wireless transmissions. Among its customers are Apple, Huawei, and Samsung.
Skyworks has a 16-year profit streak going. It has notched a return on equity of 19% or more for nine years running. Like most technology stocks, it was whacked for a big loss last year. But so far this year it’s up 24%. The stock goes for 14 times earnings.
Selling for only nine times earnings is Amkor Technology Inc. (AMKR), which does packaging and testing for semiconductor chips. The chip industry has slowed down but Amkor hasn’t – at least not yet. Among its customers are Intel, Sony and Toshiba.
In the past ten years, Amkor has increased its profits at better than a 17% annual clip. In the past year, profits were up more than 46%.
Among the investors who held Amkor shares, as of recent filings, were First Eagle Investment, Chuck Royce, and Jeremy Grantham, all market veterans that I respect.
A bunch of steel companies met my Value-Plus-Momentum criteria. I’ll go with Nucor Corp. (NUE) because it has shown a profit in 14 of the past 15 years, and has posted outstanding profits in the past two years. It had a 46% return on equity in the past four quarters, triple the level I consider good.
Nucor shares sell for only six times the past four quarters’ earnings. With auto sales humdrum and a recession possible-to-probable, analysts expect earnings to fall severely this year. Yet the stock is up 34% year-to-date, as some people are starting to think there won’t be a recession after all.
This is the 42nd column I’ve written (beginning in 2000) on stocks that combine value and momentum. One-year returns can be calculated for 40 of them, and the average one-year return has been 12.3%. That beats the 9.6% average return for the Standard & Poor’s 500 Total Return Index over the same periods.
Twenty-eight of the 40 columns have been profitable, and 21 have beaten the S&P.
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.
My “Value Plus Momentum” column from a year ago beat the index but didn’t show a profit. My choices were down 1.6% while the S&P was down 6.2%. Berkshire Hathaway Inc. (BRK), First National Bank of Alaska (FBAK) and Loews Corp. (L) were all down from zero to 3%.
Disclosure: My wife Katharine Davidge, who is a portfolio manager at my firm, owns Nucor personally and for her clients. I own Amkor in a hedge fund I run.
John Dorfman is chairman of Dorfman Value Investments in Newton Upper Falls, Massachusetts. His firm or clients may own or trade the stocks discussed here. He can be reached at email@example.com.