Chasing momentum plays can be dangerous if you’re not paying much attention to the fundamentals and, perhaps most importantly, the valuation. Indeed, the hottest stocks that tend to be talked about most on various financial podcasts and television shows tend to be among the most crowded. Indeed, crowded trades may have many speculators who are just in a name to make a quick buck. Such traders probably could not care less about the longer-term fundamentals.
At the end of the day, sharp price action may be a draw to a security. But if there’s too much greed associated with a name, it’s probably best to let a red-hot stock cool off until it’s at least lukewarm. Indeed, there’s no shortage of U.S. stocks that are in severely overbought territory.
Momentum and value can coexist!
While momentum itself isn’t a reason to take a rain check, I think that the danger lies in trying to “buy high with the intent of selling higher” without a gauge of the value to be had in a name. Value investors seek to find underpriced securities so that they can buy and hold them until they appreciate at a level closer to intrinsic value.
Meanwhile, speculators and traders just buy on hot price action with the belief that someone else will come along (either due to the fear of missing out (FOMO) or a lack of exposure in the heated and most exciting corners of the market) and be more than willing to pay a higher price than you did when you hit that buy button.
For value investors who also want growth and excitement, cheap names with strong share price momentum can be solid bets. Indeed, these top performers can be solid bets for investors seeking the best of both worlds.
Descartes Group
Descartes Group (TSX: DSG) is a $11.65 billion technology firm that investors may be sleeping on as we head into midsummer. The stock has been on a great run, up 26% year to date. Even at all-time highs, I view Descartes Group as a great low-cost growth play while it’s going for 48.3 times forward price to earnings (P/E).
Just a few months ago, the firm bought Aerospace Systems Group in a $83 million deal. Such merger and acquisition (M&A) moves, while small in scale, could make a big difference to growth over the long haul. As the under-the-radar software juggernaut continues bolstering its logistics software services, some more multiple expansion may be warranted.
Agnico Eagle Mines
Agnico Eagle Mines (TSX: AEM) is a precious metals miner that’s been shining bright for investors so far this year. Thanks to the surge in gold prices, the miner is up a whopping 41% year to date. As a well-run miner with improving economics, I’d not shy away from the name if you lack gold exposure. The miner stands out as a far better bet than gold bullion or a gold exchange-traded fund (ETF) if gold rallies even higher over the next year.
Indeed, miners are more leveraged plays to ride a commodity price surge. Though the name could be more volatile than bullion itself, I do view the 2.17% dividend yield as rich and ready to grow further. Also, at 22.1 times forward P/E, shares seem severely undervalued even after the recent parabolic melt-up.
