In today’s fast-paced stock market, investors are always on the lookout for companies that have momentum on their side. Finding such momentum stocks that are outpacing the overall market can lead to significant gains, especially for those willing to hop on board while these stocks are hot.
Of course, when chasing momentum stocks, it pays to be selective. While some high-flyers fizzle out quickly, others have the fundamentals and market leadership to deliver further upside. Importantly, when dealing with momentum stocks, risks are always a factor to weigh. Some of these names may not offer much margin of safety at current levels. However, for investors comfortable taking on some risk in exchange for standout returns, these stocks offer tons of short-term and long-term potential.
Sterling Infrastructure (STRL)
Sterling Infrastructure (NASDAQ:STRL) has been absolutely crushing it in 2023, with the stock up a whopping 240% in the past year. While some investors may be wary of chasing a stock after such a massive run-up, Sterling still looks attractively-valued for long-term investors. The company focuses on transportation, e-infrastructure, and building solutions infrastructure construction projects.
Despite the stock’s huge gains this year, Sterling trades at just 19-times forward earnings. That seems like a very reasonable multiple, given Sterling’s impressive growth trajectory. In the latest quarter, revenue grew 13% year-over-year to $522 million. Earnings per share came in at $1.27, representing 48% growth versus the prior year period. Looking ahead, analysts expect Sterling to deliver around 15% earnings growth for the foreseeable future, while revenue is projected to rise at a double-digit pace.
All this revenue growth is being driven by strong execution and robust demand across all of its end markets. The company’s e-infrastructure segment, which provides infrastructure services for data centers and manufacturing facilities, led the way with 11% growth last quarter. Notably, Sterling’s backlog grew 42% year-over-year to a record $1.8 billion at quarter end. Backlog conversion supports the bullish revenue outlook.
With that in mind, Sterling is clearly capitalizing on several positive secular trends, like data center expansion and onshoring of manufacturing. These macro tailwinds should continue to drive healthy growth. Yet even without relying on external catalysts, Sterling has initiatives in place to boost margins via vertical integration and a focus on higher-return projects. Margin expansion combined with Sterling’s top-line momentum is a powerful recipe for earnings growth.
Construction Partners (ROAD)
Shares of Construction Partners (NASDAQ:ROAD) have rallied 53% year-to-date, but this infrastructure stock still offers promising upside based on U.S economic trends. Construction Partners specializes in highway and road construction projects across the southeastern United States.
Infrastructure stocks like Construction Partners stand to benefit from a confluence of economic tailwinds. As the U.S. aims to modernize dated infrastructure nationwide, government investment in roads and highways is ramping up. The 2021 Infrastructure Investment and Jobs Act earmarked $110 billion specifically for roads and bridges over five years. Meanwhile, corporations are onshoring manufacturing capacity back to the U.S. at a rapid clip to protect supply chains. With southeast population growth continuing at a healthy clip, Construction Partners inhabits an enviable niche.
These secular trends fueled 10.5% year-over-year revenue growth in Construction Partners’ fiscal third quarter. Gross margins expanded considerably versus the prior year period, driving earnings pers share of 41 cents, which beat estimates by 7 cents. Construction Partners’ backlog also grew 20% year-over-year to a record $1.6 billion at quarter end. To top it all off, robust backlog conversion supports management’s guidance for around 18% revenue growth in the current fiscal year.
While infrastructure stocks like Construction Partners are unlikely to deliver sizzling growth throughout the entire economic cycle, the current environment is characterized by positive secular trends for the industry. Thus, I believe more steady upside is ahead.
DXP Enterprises (DXPE)
Shares of industrial products distributor DXP Enterprises (NASDAQ:DXPE) haven’t joined in on this year’s bull market rally, with the stock trading roughly flat year-to-date. However, DXPE looks like an attractive pick, trading at just 7-times forward earnings.
Despite lackluster stock performance, DXPE’s financial results reveal a company firing on all cylinders. Sales rose 16% year-over-year in the second quarter, while adjusted earnings per share of $1.06 topped estimates. DXP operates in the sweet spot in terms of infrastructure spending, serving industries like energy, aviation, and water treatment. Analysts forecast continued sales momentum, projecting full-year 2023 revenue growth of 15% to 16%.
Yet, DXPE stock trades at just 0.34-times sales, a bargain-basement multiple, at least in my eyes. Both the company’s gross margin and EBITDA margin improved significantly last quarter, with its EBITDA margin hitting 10.6%. Pricing power in industrial distribution markets and operating leverage from higher volumes also boosted profitability. Looking ahead, DXP likely won’t deliver sizzling growth through all phases of the economic cycle, but its cyclical exposure appears to be skewed favorably for the next 12-18 months. The lone Wall Street buy rating puts the price target at $55, implying 57% upside.
Huron Consulting Group (HURN)
Shares of professional services firm Huron Consulting Group (NASDAQ:HURN) have delivered market-trouncing returns over the past two years, with HURN stock soaring nearly 45% year-to-date in 2023. Despite this impressive performance, HURN stock still looks attractively-priced at 23-times forward earnings, given its differentiated positioning within attractive, high-growth end markets.
Over the past eight quarters, Huron has seen accelerating sequential revenue growth. This top-line momentum reflects Huron’s leadership in must-have services like digital migration and revenue cycle managed services. These capabilities are mission-critical, rather than discretionary, for Huron’s clients.
Huron expects adjusted earnings per share of between $4.35 and $4.65 in 2023, representing roughly 32% growth at the midpoint, handily exceeding original guidance. Huron’s early progress on its 2023 targets supports management’s goal of generating sustainable mid-teens adjusted EBITDA margins over time. Improved operating leverage should drive continued earnings growth.
While the company’s current forward price-earnings multiple of 23-times does represent a premium multiple, Huron warrants this premium valuation based on its stellar track record, secular growth drivers, and recurring revenue model. In a challenging economic climate, Huron’s offerings help clients reduce costs and drive efficiency. And with nearly half of Huron’s revenues now derived from digital capabilities, Huron sits on the right side of secular trends reshaping industries.
Brazil’s fintech industry is still in its nascent stages, with massive room for growth in the years ahead. StoneCo (NASDAQ:STNE) is well-positioned to capitalize as digital payments and financial services take off across the country. Since hitting highs in early 2021, STNE stock has plunged nearly 90%, battered by a confluence of factors including surging interest rates, regulatory changes, and moderating consumer spending.
However, after this steep decline, STNE stock appears to have found its footing. Shares have traded sideways in the $8-$11 range since March 2022, establishing a base. With the stock back to trading around $10 per share, I believe it now offers an attractive entry point with a favorable risk-reward profile.
Looking at the company’s financials, StoneCo reported strong second-quarter results that beat expectations on the bottom-line but missed its top-line by a hair. Total revenue grew 33% annually to $592 million, powered by a 19% increase in core MSMB payment volumes. This growth is especially impressive given the macro headwinds in Brazil, including high interest rates and a cooling economy. Impressively, the company’s adjusted net income soared nearly 600% year-over-year.
These results showcase StoneCo’s ability to drive growth and improve profitability, even against negative economic crosscurrents. Analysts expect robust growth to continue, forecasting full-year revenue at nearly $2.3 billion, up 26% year-over-year. Over the long term, I’m bullish on StoneCo’s ability to leverage Brazil’s large and underpenetrated payments market. The company serves over 1 million merchants today, but Brazil has over 30 million micro, small, and medium businesses, representing massive untapped potential. Plus, with shares having already declined nearly 90%, I believe the negativity is overdone.
Currently, STNE stock trades right around 1.4-times forward 2023 sales. That seems far too cheap for a fintech growing over 25% annually. The consensus analyst one-year upside price target currently sits at 55%.
Q2 Holdings (QTWO)
After sliding more than 77% from its early 2021 highs, cloud banking software provider Q2 Holdings (NYSE:QTWO) has stabilized and appears poised for a comeback. The company provides digital banking solutions for regional and community financial institutions.
In the second quarter, the company’s total revenue increased 10% year-over-year to $155 million. Higher margin subscription revenue (up 15%) now accounts for 75% of sales. This revenue mix shift boosted gross margins to 54%, fueling record-adjusted EBITDA of $17.6 million. Thanks to prudent cost management, Q2 also expanded EBITDA margins by 450 basis points over the past year.
Naturally, economic risks remain, especially in the financial sector. Moreover, QTWO stock trades at 40-times forward earnings. This may seem steep, but substantial earnings per share growth is expected in the years ahead. The stock’s forward price-earnings ratio drops to just 21-times, if you take 2025 expected earnings into account, far below its historical premium. Revenue is projected to grow 9-11% in 2023, while quarterly earnings per share are forecasted to jump from 20 cents right now to 36 cents in 2025. Thus, I believe there’s more upside to be had.
While airline and hotel stocks rallied in 2021 on reopening excitement, Travelzoo (NASDAQ:TZOO) shares surprisingly languished in recent months. Still, over the past year, TZOO stock has gained over 18%. I believe this niche travel deals publisher looks poised for a sustainable long-term turnaround.
Travelzoo provides its 30 million members exclusive travel offers curated from thousands of hotels, airlines, cruise lines, and other partners. In the second quarter of 2023, Travelzoo grew revenue by 19.4% year-over-year to $21.1 million. Operating profit nearly doubled to $3.3 million as the company’s operating margin expanded 500 basis points to 15%.
The icing on the cake is that all of Travelzoo’s geographic segments posted accelerating revenue growth compared to last year. Bookings and subscriber growth for the company’s Jack’s Flight Club service, which alerts members to exceptional airfare deals, increased nicely as well. While economic uncertainty has softened some consumer travel demand, Travelzoo is capitalizing by negotiating more exclusive discounts for its deal-seeking member base. Analysts forecast full-year revenue growth of 17% this year and 43% earnings per share growth.
Despite the stock’s recent boom, TZOO shares trade at just 7-times forward earnings. Travelzoo has also prudently strengthened its balance sheet, now sitting on $20 million of cash against only $10 million of debt.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.