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John Dorfman
John Dorfman
Articles (227)  | Author's Website |

Value or Momentum? How About Some of Both

You may think, in the aftermath of Tesla and GameStop's huge recent gains, that momentum investing has gone crazy

You may think, in the aftermath of Tesla (NASDAQ:TSLA) and GameStop's (NYSE:GME) huge recent gains, that momentum investing has gone crazy.

Maybe so, but momentum stocks were popular even before the Reddit "Wall Street Bets" frenzy. There have always been folks who like to jump onto a speeding train, but they have had more success lately than usual.

According to Standard & Poor's, momentum stocks surged 28.3% in 2020. Value stocks, the beleaguered school of investing to which I belong, inched up 1.4%.

Since I believe that value will make a comeback, I don't want to change my stripes entirely. But it makes some sense to search for stocks that possess both value and momentum.

Here are four of these hybrids that appeal to me.

Eagle Materials

Up 24% in the past three months, Eagle Materials Inc. (NYSE:EXP) sells construction materials such as gypsum board, rocks and gravel. It also sells materials used in oil and gas drilling, such as well cement and fracking sand.

The company, based in Dallas, has increased its revenues at nearly a 14% annual clip the past 10 fiscal years, and faster last year. It has been profitable every year since 1994.

Despite the stock's brisk rise, it's not too expensive, selling for 13 times recent earnings. My outlook is favorable for both homebuilding and infrastructure spending, so I think the stock is timely.

Tri Pointe

I'm fond of the homebuilding industry, and own a couple of homebuilding stocks. Tri Point Homes Inc. (NYSE:TPH) isn't one of them, but it makes today's list because it's up 19% in the past three months and yet sells for a down-to-earth multiple, 9 times earnings.

The homebuilding industry, which had a heyday in 2005-06, fell into a deep decline but has been coming back with oomph lately. The pandemic has spurred demand for homes in the suburbs, especially ones with room for a home office.

Tri Pointe, based in Irvine, California, aims for the upper end of the home market. Its average selling price is above $600,000, less than rival Toll Brothers but well above that of most homebuilders.

First Citizens

Based in Raleigh, North Carolina, First Citizens Bancshares Inc. (NASDAQ:FCNCA) gets most of its deposits in the Carolinas, but makes loans in about half of the United States. The stock is up 24% in the past three months and still sells for 12 times earnings, a reasonable multiple in an overheated market.

One things I look for in a banking company is a return on assets above 1.0%. First Citizens reached that milestone in 2018 and has held above it since then. The company is debt-free, a quality I like.

Founded in 1921 by five black businessmen, First Citizens says that it is the third-largest African American-owned financial institution in the U.S.

Met Life

I've recommended MetLife Inc. (NYSE:MET) from time to time in this column, and it hasn't been one of those recommendations that reader thanked me for. In the five years through October 2020, the cumulative return on Met shares was 1.1%, even after taking dividends into account.

Since October, the stock has returned more than 28%, again including dividends. (The dividend yield is 3.8%.) Why does Met suddenly have momentum? Perhaps investors think that interest rates will finally rise in 2021. That is usually good for financial companies.

In addition, MetLife beat third-quarter earnings estimates and picked up some recommendations from analysts at Morgan Stanley, Piper Sandler and Citigroup. As a result, the stock finally has some momentum, yet it sells for less than 8 times earnings, a scrawny multiple by today's standards.

Up 51%

My Value-Plus-Momentum picks from a year ago returned 51%, triple the 16.40% on the Standard & Poor's 500 Index. Albemarle Corp. (NYSE:ALB) led the way with a 105% return. Green Brick Partners Inc. (NASDAQ:GRBK) also did particularly well, up 69%.

HP Inc. (NYSE:HPQ) chipped in 18% and Progressive Corp. (NYSE:PGR) trailed the index but still gained close to 13%.

Bear in mind that my column recommendations are hypothetical: They don't reflect actual trades, trading costs or taxes. These results shouldn't be confused with the performance of portfolios I manage for clients. Also, past performance doesn't predict future returns.

Longer term, my record in this series of columns is good but less spectacular than in the past year. Today's column is the 38th in the series, which began in 2000. One-year returns can be calculated for 36 columns.

The average 12-month return has been 12.9%, compared to 9.7% for the S&P 500. Of the 36 columns, 26 have shown a profit and 19 have beaten the S&P.

Disclosure: One of more of my clients owns shares in Green Brick Partners, MetLife and Toll Brothers. I don't own any of them personally.

John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].

About the author:

John Dorfman
John Dorfman founded Dorfman Value Investments in 1999. Previously he was a Senior Special Writer for The Wall Street Journal, executive editor of Consumer Reports, and a managing director at Dreman Value Management. His syndicated column appears on Tuesdays on this website and also in the Pittsburgh Tribune Review, Ohio.com, Virginian Pilot and Omaha World Herald.

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