I am a dyed-in-the-wool value investor and rarely stray too far from the principles of deep value and community bank stock investing. But I also do a lot of satisfying number crunching of other approaches.
I always get an enormous kick out of stubborn and closed-minded people who still have the age-old argument about value and growth investing. The truth is that both are good approaches, using the correct measurements along with discipline. People are always shocked when I say that if were a much younger man and not so stubborn, momentum strategies would be a bigger part of my approach. They work almost as well as value strategies.
The other compelling reason to use momentum is that it is not correlated with value strategies most of the time. When momentum underperforms, value outperforms and vice versa. Adding momentum to a portfolio can actually decrease overall volatility and improve long-term returns. Momentum works in the short run and value works in the long run. That makes them a solid combination for serious investors who want the best of both worlds. That is why momentum is 20% of my grand unified investing theory.
In my theory, I outlined a simple earnings and momentum approach that beats the market rather solidly over time. It's a qualitative, not quantitative approach. It simply buys those stocks that have earnings growth of 25% over the past year that have positive performance and are beating the market over the past year. They also have to be outperforming the S&P 500 by 20% over the prior three months.
I am not a great quant or momentum investor but I have a friend who is one of the best. You can improve my crude model by dumping the resulting tickers into the Stock Grader Tool that Louis Navellier has on his website Navellier.com. Once you hit send, you get a quick result of letter grades that use fundamental and price measure to rank stocks. Only buy those that have an A rating for both quantitative and fundamental grades. I thought it might be fun to run this screen at the first of each month and give us a starting point for the momentum portion of a portfolio
There are some really interesting stocks on the list but they are not the stocks you might usually think of for momentum investors. When you think of Mo-Mo stocks people often mix them up with popular stocks. The ones that are hitting on both earnings and price growth are usually something else altogether.
I confess that before today I have never heard of Fix Comfort Systems (FIX). They design and install HVAC systems and provide specialized application for things like building automation control systems, fire protection and electronic monitoring for commercial real estate projects. Earnings are on fire with profits leaping by over 100% in the most recent quarter, and the stock has also been quite flammable this year with the shares up 88%.
Judging by this list the commercial real estate sector of the economy is doing pretty well. Walker and Dunlop (WD) originates, sells, and services a range of multifamily and other commercial real estate financing products for owners and developers of real estate projects. Earnings were up more than 60% in the most recent quarter and the stock is easily beating the market with the shares up 65% so far in 2015. The interesting thing here is that the price-to-earnings ratio is just 12, so it's not as ridiculously valued as some other momentum stocks.
Many banks, especially community banks, have walked away from the highly competitive and price-sensitive residential mortgage business. Lending Tree (TREE), however, has rushed to fill the void. The company, which advertises the ability to shop and apply for a mortgage while sitting around in your boxer shorts, has seen enormous growth with earnings up over 100%. The stock has done well, too, with the shares up more than 150% this year. Buyers keep applying the pressure, however, so the stock still has strong momentum.
Business is pretty good in the telecommunication construction business as well. Dycom Industries (DY) places and splices fiber, copper and coaxial cables to telecommunications providers. They also provide cell tower construction, lines and antenna installation, and foundation and equipment pad construction services for wireless carriers. Business is good, with earnings up more than 100% this year, and that has driven the stock to more than 100% gains as well.
Online travel service Expedia (EXPE) also makes our list of straight-A momentum stocks. Earnings are up almost 80% year over year and the stock price had climbed by about 60% in 2015. People are traveling more in spite of crowded flights and middle seats and that is helping both the top and bottom line. Management has also laid out aggressive expansion and acquisitions plans that if successful could keep driving earnings and the stock price higher.
It is worth noting that just these five stocks make the top grade as price and earnings momentum stocks. There are more names on the screen, but just this small handful pass the screen used by Navellier. That could be a good argument for a large cash position in the momentum portion of your portfolio.