Phillips 66 and 4 Other Stocks Show Value and Momentum
A body in motion tends to remain in motion at a constant speed and velocity unless acted upon by an outside force, says Newton's first law of motion. The stock market is full of outside forces. Nonetheless, the momentum effect is real in the market.
That's why, twice a year, I write about stocks that I believe possess both value and momentum. My measure of value is that the stock must sell for 15 times the company's earnings or less. My measure of momentum is that the stock must be beating the overall market for the past three months and for the past year.
Phillips 66, for example, fits the bill. So do four other stocks discussed below.
Phillips 66
Phillips 66 (NYSE:PSX) has returned 53% in the past year, versus 21% for the Standard & Poor's 500. (These figures include both capital gains and dividends.) The company, based in Houston, operates a dozen oil refineries.
It's the third-largest independent refining company in the U.S., after Marathon Petroleum (NYSE:MPC) and Valero Energy (NYSE:VLO). Here, independent means that a refiner isn't part of a large integrated oil company such as Exxon Mobil (NYSE:XOM) or Chevron (NYSE:CVX).
For refiners, an ideal world is one in which crude oil (their raw material) is cheap, but keen demand is pushing up the price of gasoline, jet fuel and home heating oil. Conditions now aren't perfect for the refiners, but they are pretty good, and I expect that will continue.
Paccar
Paccar Inc. (NASDAQ:PCAR) has returned 45% in the past year, and 6% this year through Feb. 2. The Bellevue, Washington, company makes trucks under the Paccar, Kenworth and Peterbilt brands. In U.S. heavy-truck sales, it is second only to Daimler AG (XTER:DTG) of Germany, which makes the Freightliner.
Truck sales are tied to the health of the economy and of course there will be another recession at some point. But one didn't materialize in 2023, despite widespread predictions. The great investor Peter Lynch said that more money has been lost by anticipating recessions than in the recessions themselves.
D.R. Horton
I like several homebuilding stocks, including the largest of them, D.R. Horton Inc. (NYSE:DHI). It's the largest U.S. home builder and serves all price points. The stock sells for 11 times earnings and has returned 44% over the past year.
The story with housing stocks is a tug of war. Pulling them backward are mortgage rates that are near a 20-year high. Pulling them forward is a shortage of enough single-family homes to meet pent-up demand.
In the past, many home builders were top-heavy with debt. Horton wasn't as bad as some, and it has strengthened its balance sheet to the point where debt is only 23% of stockholders' equity.
Bel Fuse
Much smaller than the companies mentioned so far is Bel Fuse Inc. (NASDAQ:BELFA), which makes electronic components for cars, medical devices and other applications. Shares in the Jersey City, New Jersey company are up 74% in the past year and have more than tripled in the past five years.
The company's profitability was mediocre for years, but has improved greatly in the past two years. Its return on stockholders' equity was 27% in the past four quarters. I consider anything over 15% good, and over 20% very good.
Warrior Met Coal
Despite glaring environmental problems, the coal industry refuses to lie down and die. Many coal stocks did well in the past year, in large part because they started from dirt-cheap valuations.
Many are still cheap. One that I like is Warrior Met Coal Inc. (NYSE:HCC), which mines metallurgical coal (used in steel making) in Alabama and sells it mostly to Latin America. Even after rising 64% in the past year, the stock sells for seven times earnings.
The record
My Value Plus Momentum picks from a year ago returned 23.4%, edging out the Standard & Poor's 500 Total Return Index, which was up 22.6%. Both figures are total returns including dividends.
The victory was due entirely to one stock. PulteGroup Inc. (NYSE:PHM) returned 86%. Three of my other picks had gains but less than the index. Skyworks Solutions Inc. (NASDAQ:SWKS) was down 5%.
This is the 44th column I've written about stocks that possess both value and momentum. One-year returns can be calculated for 42 of them. The average one-year return has been 12.2%, versus 10.0% for the S&P.
Twenty-nine of the 42 columns have been profitable and 22 have beaten the index.
Bear in mind that my column results are hypothetical and shouldn't be confused with results I obtain for clients. Also, past performance doesn't predict the future.
John Dorfman is chairman of Dorfman Value Investments in Boston, Massachusetts. His firm or clients may own or trade the stocks discussed here. He can be reached at jdorfman@dorfmanvalue.com.
This article first appeared on GuruFocus.
