Momentum investing can be dangerous, especially for a beginner who neglects value. Undoubtedly, momentum isn’t a bad thing in itself, as long as the investor puts in the homework and ensures they’re not running the risk of overpaying. Of course, it’s always more comforting for a value investor to wait for a pullback. That said, I think valuation should play a bigger role in moves made by a truly long-term investor.
In this piece, we’ll look at two TSX stocks that have momentum at their back alongside a valuation that’s still compelling. Many new investors may be shying away from momentum plays after the horrific tech wreck of 2022. As long as there are real fundamentals backing up a firm, rather than just excitement and enthusiasm from other investors around you, investors need not fear momentum as long as their expectations are in check.
Remember, hot momentum stocks don’t stay hot forever. And when they cool down, many investors late to the party can take a big hit on the jaw. That’s why it’s so important to be mindful of the price being paid. When other investors lose sight of a stock’s valuation, they get euphoric and more willing to pay a higher price. That’s how trouble can happen and how bubbles begin.
Without further ado, let’s get into the names that I think are backed by cash flows and predictable earnings growth trajectories — something that many burst bubbles lacked in the plunge of 2022.
Fairfax Financial Holdings
Fairfax Financial Holdings (TSX: FFH) is headed by legendary value investor Prem Watsa. The investment business has had mixed results in recent years. Watsa is all about the long term. And I think that those who are patient enough with the man will get results over time.
Prem Watsa ploughed through the Great Financial Crisis with impressive gains. With a recession on the horizon, I think the odds are good that Fairfax will be able to outperform. Fairfax’s managers are all about unlocking returns relative to risks. He knows the business cycle booms and busts. And Fairfax tends not to go all out when times are good, because bad times can always be around the corner.
The performance of Fairfax’s insurance business has slowly but steadily improved in recent years. As solid underwriting and improving investment performance help drive FFH stock higher, I think investors should consider the name if they seek a sound long-term performer with one of the most brilliant chief executive officers in Canada.
Even after a 67% surge off October lows, I still view FFH stock as a value play. It trades at 15.45 times trailing price to earnings right here.
Constellation Software
Constellation Software (TSX: CSU) is a tech stock that doesn’t get much attention in the headlines, at least relative to other high-flying tech companies. Today, shares are off around 3% from its all-time high. Over time, the software firm has steadily moved higher, crushing the TSX while exhibiting less volatility (0.89 beta).
Though CSU stock is fresh off a 43% surge from October lows, I still don’t view the Canadian software behemoth as overvalued. As valuations across the tech scene come in, I’d look for the firm to take advantage of potential discounts in the Canadian software space.
In short, Constellation’s a great business, with a proven model of creating value for investors over time. Long-term momentum is going strong. I’d bet it’ll continue to go strong for years to come.
