Last week, I took a quick look at combining value and momentum strategies to produce higher returns. The works of people like Cliff Asness of AQR Capital and Josef Lakonishok of LSV Asset Management seem to indicate that this counter-intuitive approach to investing in stocks actually has substantial merit.
Buying cheap stocks that have positive short-term performance does, in fact, beat the market over time. The presence of price momentum in formerly unloved stocks can be a powerful indicator that conditions are improving and market participants are starting to understand the value and potential of the underlying company. At that point, the stock price can often continue to move higher.
In last week’s article, I used my favorite value metric — the price-to-book-value ratio — and price momentum to uncover some interesting ideas. Today, I want to look at those stocks that are trading at low PE ratios and exhibiting strong price momentum as investors begin to buy into the recovery of the company. It is not a very long list, but there are some very interesting names that are worth considering even in the current, extended stock market.
Star Gas Partners (SGU)
One of the stocks on the list is one of my favorite long-term income stocks. Star Gas Partners (SGU) has successfully rolled up Mom-and-Pop propane and heating oil distributors to become one of the largest fuel distributors in the country. Star Gas has made it clear that it’s open to new deals to continue to grow the company service area and customer base. SGU stock yields 5.5% right now, and Star gas has increased the dividend by an average of 10% annually for the past five years. The stock has been very strong so far this year, rising more than 25%, but the shares still trade with a PE ratio of just 7.91.
Hess (HES) has undergone some changes this year. The company has closed its refining operation and sold assets in Indonesia, and now it’s trying to sell other operations in Thailand. Hess has agreed to sell its retail operation to Marathon Oil (MRO) for $2.87 billion and focus on the core oil and gas exploration and production business. Investors have applauded the moves, and HES stock is up more than 20% so far in 2014. In spite of the strong price improvement, the stock still trades at just 8 times earnings.
Visteon Corp. (VC)
Visteon Corp. (VC) has been a major beneficiary of strong auto sales trends, and VC stock is up more than 17% so far this year. The company sells climate control, seating and electronic components to the major auto manufacturers around the world. Thanks in part to very strong earnings growth, VC stock is still selling at just 8 times earnings right now. Earnings are up five-folds this year, and analysts expect Visteon to ride the auto sales wave to strong growth over the next year.
Bottom Line: Although it’s getting difficult to find cheap stocks, combining value and momentum just might help us find value stocks that lead the interest-rate-fueled, late-stage rally many pundits see developing in the stock market in the second half of 2014.
As of this writing, Tim Melvin was long SGU.