Reasonably Priced Momentum

Several readers asked if I could find any reasonably priced momentum stocks, always a challenge. That goal is a common one, because who doesn’t want the best of both worlds? A momentum bargain is like a train that’s pulling away from the station but still has an open door at the back through which a nimble passenger can jump on board.

What I looked for is:

  • A rising earnings-per-share estimate over the past three months

  • More than two analysts covering the stock

  • Earnings estimates beaten in the last four quarters

  • A stock price relative strength over the past month greater than that of the S&P; 500

  • Both the price/sales and price/earnings ratios less than the 5-year average

That got me down to less than 100 stocks. From there, I looked at my own stocks-to-watch database to see which ones appeared. That cut the list down to fewer than 30. I then extracted the ones from there with 5-star ratings from Morningstar.

Here are the resulting nine winners sorted in descending order by the percentage the stock closed last Friday below its 52-week high:

  • Del Monte (DLM) … 32% below its 52-week high
  • P.F. Chang’s (PFCB) … 27% below its 52-week high
  • Walgreen (WAG) … 26% below its 52-week high
  • Panera Bread (PNRA) … 23% below its 52-week high
  • Int’l Speedway (ISCA) … 22% below its 52-week high
  • Zimmer Holdings (ZMH) … 21% below its 52-week high
  • 3M (MMM) … 20% below its 52-week high
  • Accenture (ACN) … 12% below its 52-week high
  • Johnson & Johnson (JNJ) … 2% below its 52-week high

Do any of these look good? You bet. In fact, The Kelly Letter owns one of them. We bought Panera Bread when everybody said high food prices would forever depress earnings at the popular bakery.

If you’ve been to one you know it offers free wireless internet in a cozy atmosphere that includes a fireplace in many locations. The menu has an assortment of addictive sandwiches, good soups, and fresh made pastries.

I spoke with former Panera president Neal Yanofsky last fall about the company’s prospects, and shared the highlights with subscribers. From that conversation, it became clear that the high food cost issue would go away eventually because either (A) food prices would drop back down to where they were a couple of years ago, or, (B) they would remain high and the higher cost would be reflected in higher prices on the menu as all restaurants raised prices, thus protecting profit margins.

It looked like a short-term issue providing a cheap stock price for a business that was on roll, so to speak. Indeed, we’ve gained 18% since investing, and expect a lot more from here.

You may discover similar gems in the above list.

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