15 value-stock picks for momentum investors from a money manager who has outperformed the S&P 500 for 30 years (2024)

During the first five months of 2023, there were investors who had difficulty believing in a sustained stock-market rally because the action was dominated by the largest technology companies. But the breadth of participation in the rally has expanded since then.

Some investors and traders look to jump on momentum trends. In the current bull market, this might mean buying shares of technology companies trading at high valuations to expected earnings. But you don’t need to confine a momentum approach to growth stocks.

John Buckingham, the editor of The Prudent Speculator investing newsletter, has highlighted 15 stocks that are part of a group of 49 he recommended at the end of June for investors to follow seven economic and market themes. These can be considered momentum plays, since all have risen more than 15% since May 31. They are listed below, along with Buckingham’s comments about the themes.

The Prudent Speculator is published by Kovitz Investment Group of Chicago and has the top ranking for 30-year returns among newsletters tracked by theHulbert FinancialDigest. The average annualized 30-year return for the combined TPS portfolios has been 14.08% through June 30, compared with 10.05% for the S&P 500, with dividends reinvested monthly, according to Hulbert.

The market’s bullish breadth has expanded

First, here’s how the stock-market rally has broadened. For 2023 through May 31, the S&P 500 SPX, -0.07% rose 8.9%, but only 220 of the stocks were up for the year at that point. And the action was dominated by large tech companies. Here are the top five performers in the index this year through May 31:

Company Ticker 2023 price change through May 31 Price change – May 31 through July 24 2023 price change through July 24 2022 price change Price change since end of 2021 Forward P/E Market Cap ($bil)
Nvidia Corp. NVDA, -0.95% 159% 18% 205% -50% 52% 46.8 $1,102
Meta Platforms Inc. Class A META, +0.24% 120% 10% 142% -64% -13% 21.2 $645
Advanced Micro Devices Inc. AMD, -1.71% 83% -6% 71% -55% -23% 30.5 $178
Salesforce Inc. CRM, +0.33% 68% 1% 70% -48% -11% 27.6 $220
Tesla Inc. TSLA, +0.34% 66% 32% 118% -65% -24% 64.7 $853
Source: FactSet

Some notes about this data:

  • Aside from the total-return figures in the third paragraph, all price changes in this article exclude dividends.
  • The market-capitalization figures underline how influential stocks can be on the full index. These five stocks make up 7.5% of the portfolio of the SPDR S&P 500 ETF Trust SPY, -0.13%, which tracks the benchmark index. The five largest components of the index by market cap are Apple Inc. AAPL, -0.90%, Microsoft Corp. MSFT, -0.23%, Amazon.com Inc. AMZN, +0.87%, Nvidia Inc. NVDA, -0.95% and Alphabet Inc. GOOGL, +0.21% GOOG, +0.10%. Together they make up 23.6% of the SPY portfolio, including two common-share classes of Alphabet that are in the index. The worst performer among these five has been Alphabet’s Class C stock, which has risen 37%, while Nvidia’s stock has tripled.
  • The S&P 500 has risen 18.6% this year, following a 19.4% decline in 2021. The index is still down 4.4% from the end of 2021, again excluding dividends.
  • Aside from Meta, the five stocks in the table above all trade at significantly higher forward price-to-earnings ratio than the index, which has a forward P/E of 19.7, based on weighted consensus estimates among analysts polled by FactSet. The index’s P/E has increased from 16.9 at the end of 2022, but is down from 21.5 at the end of 2021.

Since the end of May, the S&P 500 has increased another 9%, and during this period 458 stocks in the S&P 500 have risen. This is quite an expansion of the breadth of momentum following the first five months of the year.

Value stocks for momentum plays

The Prudent Speculator’s flagship portfolio includes 80 stocks identified as suitable for three- to five-year investments. Starting with about 3,000 companies publicly listed in the U.S., Buckingham and his colleagues narrow the list to identify highly liquid, “potentially undervalued” names relative to the market. Every stock is rated buy or sell.

There is no one value measure that Buckingham looks at, but the TPS portfolio had a forward P/E of 13.2 as of June 30, compared with ratios of 21.1 for the Russell 1000 index and 16.1 for the Russell 1000 Value Index, according to Kovitz, citing Bloomberg data. Beyond the numbers, Buckingham and his staff make their own qualitative assessments of companies.

Among the 49 stocks The Prudent Speculator recommended in its midyear outlook to play seen specific themes, these 15 have risen more than 15% since May 31 and were highlighted for momentum by Buckingham during an interview on July 24. Here they are, sorted by how much their prices have risen since the end of May:

Company Ticker Industry Price change – May 31 through July 24 2023 price change through May 31 2023 price change through July 24 Forward P/E Dividend yield
Western Alliance Bancorporation WAL, +2.48% Regional Banks 47% -43% -16% 6.4 2.98%
Cummins Inc. CMI, +0.75% Trucks/ Construction/ Farm Machinery 26% -16% 6% 12.9 2.60%
MetLife Inc. MET, +0.70% Multi-Line Insurance 25% -32% -14% 7.3 3.40%
Nutrien Ltd. NTR, +0.67% Chemicals: Agricultural 26% -28% -9% 11.4 3.30%
KeyCorp KEY, +0.89% Major Banks 27% -46% -32% 9.3 7.17%
Bank OZK OZK, +0.52% Regional Banks 24% -14% 7% 7.6 3.45%
Ethan Allen Interiors Inc. ETD, +2.18% Home Furnishings 24% -5% 17% 10.2 4.74%
General Motors Co. GM, +0.06% Motor Vehicles 21% -4% 17% 5.6 0.93%
Digital Realty Trust Inc. DLR, +0.71% Real-estate investment Trusts 20% 2% 23% 108.0 4.06%
HF Sinclair Corp. DINO, +2.87% Oil Refining/ Marketing 21% -20% -3% 7.3 3.68%
Eaton Corp. PLC ETN, +0.03% Electrical Products 18% 12% 32% 23.0 1.66%
Fifth Third Bancorp FITB, -0.11% Regional Banks 18% -26% -13% 8.9 4.68%
PNC Financial Services Group Inc. PNC, +0.23% Major Banks 17% -27% -14% 10.6 4.62%
EOG Resources Inc. EOG, +0.60% Oil & Gas Production 18% -17% -3% 10.9 2.65%
JPMorgan Chase & Co. JPM, -0.38% Major Banks 16% 1% 18% 10.4 2.58%
Source: FactSet

Click on the tickers for more about each company, fund or index.

Clickherefor Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

You may have noticed the high forward P/E for Digital Realty Trust Inc. DLR, +0.71%, which runs data centers and provides related services to corporate clients. But this is an example of how a deeper look at the numbers may tell a different story. This real-estate investment trust has a dividend yield of about 4%. REITs are tax-advantaged companies typically relied on by investors for dividend income. A REIT avoids income taxes if it pays out at least 90% of its profit. But analysts typically look at a REIT’s funds from operations (FFO) to estimate how much money is available to cover dividend payouts. FFO adjusts earnings to exclude gains or losses on the sale of real estate, while adding depreciation expense back in. Adjusted FFO (AFFO) goes further, subtracting estimated costs to maintain properties. For the next four reported quarters, analysts polled by FactSet expect Digital Realty Trust’s AFFO to total $5.91 per share, well above its annual dividend rate of $4.88. The stock closed at $121.13 on Monday, making for a forward price-to-AFFO ratio of 20.5.

Among the listed companies, Buckingham expects DLR and Eaton Corp. PLC “to benefit from widespread adoption” of artificial intelligence.

There are six banks on the list, including KeyCorp KEY, +0.89% of Cleveland, which has been the hardest hit of these 15 stocks in 2023. The one with the most momentum since the end of May has been Western Alliance Bancorporation WAL, +2.48% of Phoenix. Investors have been worried about deposit flight in the wake of the failures of Silicon Valley Bank of Santa Clara, Calif., and Signature Bank of New York in March, followed by the closing of First Republic Bank of San Francisco in June.

Read: Western Alliance seeks to ‘return to normal’ after banking crisis

While acknowledging investors’ concerns over banks’ narrowing margins, as they are forced to pay more for deposits and wholesale funding, and worries over commercial real estate credit quality, Buckingham believes the hammering of bank stocks this year has been “excessive.”

“Regional banks offer superb risk-reward profiles these days with rich dividend yields,” he wrote in The Prudent Speculator’s midyear update, in which he highlighted Bank OZK OZK, +0.52%, Fifth Third Bancorp FITB, -0.11%, KeyCorp and JPMorgan Chase & Co. JPM, -0.38%, among the banks listed above.

One company he highlighted under his expectation that the Federal Reserve’s cycle of interest-rate tightening will lead to a “soft landing” as inflation continues to decline, or at worst will suffer a mild recession, was HF Sinclair Corp. DINO, +2.87%, a fuel refiner. (He also likes oil and natural-gas producer EOG Resources Inc. EOG, +0.60% for “enhanced profitability” as global supplies tighten.) And with expectations that the Fed will soon end its rate-raising cycle, he pointed to interest-sensitive stocks such as MetLife Inc. MET, +0.70%.

As the use of electric vehicles becomes more widespread, Buckingham said he recommends General Motors Co. GM, +0.06%, which has one of the lowest P/E ratios on the list.

Don’t miss: Stocks in this left-behind sector are expected to rally as much as 33%

As an expert in finance and investment, my extensive knowledge in the field allows me to provide valuable insights into the dynamics of the stock market and investment strategies. The information presented in the article reveals a nuanced understanding of market trends, momentum plays, and the broader economic landscape. Let's break down the key concepts discussed in the article:

  1. Market Breadth and Momentum Trends:

    • The article begins by addressing the skepticism among investors during the first five months of 2023 due to the dominance of large technology companies in the stock market rally.
    • It highlights the expansion of the market's bullish breadth since then, with a focus on investors and traders looking to capitalize on momentum trends.
  2. Highlighted Stocks and Economic Themes:

    • John Buckingham, the editor of The Prudent Speculator investing newsletter, has recommended 15 stocks out of a group of 49 that align with seven economic and market themes.
    • These stocks are considered momentum plays, having risen more than 15% since May 31.
  3. Performance of Top Tech Stocks:

    • The article provides performance data for the top five technology companies in the S&P 500 for the year through May 31, emphasizing the dominance of large tech companies during that period.
  4. Market Capitalization Impact:

    • The market-capitalization figures highlight the significant influence of certain stocks on the overall market index.
    • The top five stocks mentioned constitute a substantial portion of the SPDR S&P 500 ETF Trust portfolio.
  5. Forward Price-to-Earnings Ratios (P/E):

    • The article compares the forward P/E ratios of the mentioned stocks with the S&P 500 index.
    • It notes that, aside from Meta, the listed stocks trade at higher forward P/E ratios than the index.
  6. Market Performance and Expansion of Breadth:

    • The S&P 500 has risen 18.6% in the current year, following a decline in 2021. The index is still down 4.4% from the end of 2021.
    • The breadth of the market has expanded, with 458 stocks in the S&P 500 rising since the end of May.
  7. Value Stocks for Momentum Plays:

    • The Prudent Speculator's flagship portfolio includes 80 stocks identified for three- to five-year investments, emphasizing a value-oriented approach.
    • The article lists 15 stocks from the midyear outlook that have risen more than 15% since May 31.
  8. Analysis of Specific Companies:

    • The article provides insights into specific companies, their industries, price changes, forward P/E ratios, and dividend yields.
    • It emphasizes qualitative assessments made by experts in addition to quantitative measures.
  9. Deeper Look at Digital Realty Trust Inc. (DLR):

    • The article uses Digital Realty Trust Inc. as an example to illustrate how a deeper analysis of financial metrics, such as Adjusted Funds from Operations (AFFO), can provide a more accurate picture of a company's financial health.
  10. Expert Commentary on Various Sectors:

    • John Buckingham's commentary includes insights on sectors such as regional banks, fuel refining, interest-sensitive stocks, and electric vehicles.

In conclusion, the article provides a comprehensive view of the stock market's performance, the influence of technology stocks, momentum plays, and the expert recommendations of John Buckingham from The Prudent Speculator. This information is crucial for investors looking to navigate the dynamic landscape of the financial markets.

15 value-stock picks for momentum investors from a money manager who has outperformed the S&P 500 for 30 years (2024)
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