Ordinarily, value and momentum investors are thought of as being at opposite ends of the spectrum.
Value investors are thought of as the green-visor-wearing types, crunching the numbers in a dark corner of the basement looking for undervalued securities, while momentum investors are the wild-eyed gunslingers who buy all sorts of crazy stuff just because it is going up.
There is a touch of truth in that dichotomy, in that value and momentum are the two strongest and longest-lasting market anomalies, and for a variety of economic and behavioral reasons will probably be so as long as there are markets.
But some astute academics have put visors on the gunslingers and found that value stocks with momentum characteristics outperform the market.
This approach to finding undervalued stocks to buy is beginning to be recognized by investors, and the shares have started to move higher as investors pile into the stock. By running a simple screen of stocks that trade below book value and have had strong three-month price moves, we can start to put together a combination value and momentum portfolio.
Here are three good stocks to buy to pair these themes.
Stocks to Buy for Momentum and Value: SkyWest (SKYW)
SkyWest (SKYW) shares are moving higher after they delivered an exceptional first quarter with earnings well ahead of analysts’ estimates. The stock is up 38% over the past three months and management has said they expect business to get better during the rest of the year.
A combination of cost-saving measures and lower fuel prices are key drivers in their improved operating performance.
Even though the stock is moving higher, it is still priced as a bargain, as the stock trades at just 70% of book value right now. The company is upgrading its feel, and in the past year, it has removed 134 older, less efficient planes and added 58 newer aircraft.
This should help improve long-term prospects for the airline over the next several years.
SkyWest shares are trading near their 52-week highs as momentum investors are attracted to this undervalued company.
Stocks to Buy for Momentum and Value: HHGregg (HGG)
HHGregg (HGG) is a retailer of appliances, furniture and electronics, and it has had a great deal of success getting the business back on track — and investors are starting to notice.
The company has been focusing on increasing users of its proprietary credit card, as well as more efficient advertising spending and reducing overhead to drive revenue and profit gains.
On the most recent conference call, CEO Dennis May told investors that:
“Our transformation over the past year has not been easy but we are excited about the progress that we are making and excited about the future. We are confident that these strategic transformation initiatives are beginning to bear results and will improve the long-term positioning of HHGregg.”
Although HGG stock is still cheap at 94% of book value, investors like what they are seeing and HHGregg shares are up 62% in the past quarter. The momentum could very well continue for an expanded period of time if they continue to exceed analyst expectations.
Stocks to Buy for Momentum and Value: Gulf Island Fabrications (GIFI)
Last but not least, Gulf Island Fabrications (GIFI) is benefiting from a conservative approach to business that is allowing it to weather the downturn that has hit oil- and gas-related companies.
Gulf Island is a leading fabricator of offshore drilling and production platforms and other specialized structures for the oil and gas industry.
CEO Kirk Meche told investors on the last call that the company should be fine. He said:
“While we see no significant improvements in the oil and gas sector as we move into the second half of this year, a shift in focus to marine opportunities, and continued offshore services work combined with our strong balance sheet will enable us to weather these conditions.”
With the shares trading at just 61% of book value, the stock is cheap. The board of directors clearly thinks so too, as they just authorized a $10 million stock buyback.
Outside investors are starting to notice that this company can survive until it thrives, and the buying has pushed the stock up by 29% in the past quarter.
The company pays a 3.3% dividend, so you get paid while you allow the developing momentum to push this undervalued stock higher.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities. He is the author of the Banking on Profits newsletter covering the community bank stock opportunity and the Deep Value Report that seeks out undervalued stocks that are likely to survive until they thrive and capture the value effect that has been proven to beat the market over time.