There’s a difference between momentum investing, or chasing hot stocks, and buying undervalued stocks that just happen to have a lot of impressive performance in the rear-view mirror. Indeed, I’m no fan of the all-time high list, especially after sizeable moves.
Undoubtedly, most other value-oriented investors are more likely to tell themselves that they missed a run. Like it or not, the biggest runs are sometimes followed by the steepest of declines.
Image source: Getty Images
Momentum investing cuts both ways
Momentum investing can be a double-edged sword. That said, stocks should not be avoided just because they’ve done well over the past month or year, as long as the fundamentals as still robust and your financial models tell you that a stock isn’t yet fully valued. Whenever you’ve got a stock that sports a market price below its range of intrinsic value, you may have an intriguing value play on your hands, and that’s independent of the recent price action.
On the flip side, waiting for a correction or dip in a stock you’re watching can also be a bad thing. It can result in missed opportunities. Indeed, when the stock market falls considerably, many may be inclined to postpone their buying, even though a stock is priced at well below where they’d be willing to pay. Yes, stock market plunges have bad news behind them.
Depending on how bad the news is, the long-term fundamentals may take a hit. That said, a lot of the time, market swings are less material to the longer-term narrative, and that’s where the real opportunity lies. Remember, an analyst lowering their price target on a stock after the fact should not entice you to follow suit, lowering the bar and postponing any buys you would have performed otherwise!
Momentum and value together?
In this piece, we’ll look at one intriguing stock that has solid price action behind it but is also looking cheap in my books. Consider Bank of Montreal (TSX: BMO)(NYSE: BMO), a well-run Canadian bank that just acquired Bank of the West in a historic deal. Going into 2022, a strong case could have been made that BMO was the best bank for your buck. The company clocked in an incredible 25% dividend raise, signaling confidence in management. While the raise was substantial, I don’t think investors are giving big blue nearly as much respect as it deserves after yet another incredible year.
BMO isn’t just another Big Six bank. I think it’s a far growthier bank for a very reasonable price of admission. No doubt, BMO will be busy with making Bank of the West its own. Given its competent managers and the tailwind of higher rates alongside robust economic growth in Canada, I find it really hard to pass on the stock after a modest 4% dip. After last week’s strength, BMO is down just north of 2% from its high. That’s not much of a “sale.” Given the low 11.5 times trailing earnings multiple, though, a case could be made that BMO stock is incredibly cheap and is a buy in spite of the 33% in past-year gains.
To put it simply, BMO stock has gotten a tad cheaper amid its marvelous rally. And I wouldn’t hesitate to buy even more shares given the growth profile, which I find to be among the best in the Big Six.
Bottom line
Remember the saying, past performance is no guarantee of performance moving forward. Strong action in the rear-view doesn’t suggest more strength to come.
On the flip side, though, strong action also does not indicate poor performance up ahead. The takeaway? Focus more on valuing a stock rather than momentum. The two are not mutually exclusive. In fact, it may be better to have both together in one name!
