3 Momentum Plays With Fundamental Backing

By Chris Seabury | October 19, 2008 AAA

Many times we have situations that come up that can be both a momentum and valuation play. With the momentum plays, fundamentals are important. But the technical side of things also tells us if this is a good time to get involved. By purchasing stocks that are both momentum and valuation plays we get the best of both worlds. Not only will we have strong growth, but we will also have the strength in knowing that the valuation situations will continue to deliver long after the momentum has run it course.

Three stocks that meet this criteria are: Covidien (NYSE:COV), Mastercard (NYSE:MA) and NYSE Euronext (NYSE:NYX).

Covidien and Mastercard: Value and Momentum
The recent market sell off can cause even the most seasoned investor to become nervous, but there are times when we come across both valuation and momentum plays that we can't ignore. When you look at the Covidien and Mastercard from a valuation view point they are both very interesting. Covidien is trading at a forward P/E ratio of 13. It has $1.09 billion in cash and $3.19 billion in debt. Mastercard has a forward P/E of 12. It has $2.5 billion in cash and $170 million in debt.

Looking at the technicals on the chart below reveals that Covidien is showing increasing strength on a rising stochastic and relative strength index (RSI) basis. Notice how the indicators have been rising while the stock price has been moving lower. This is known as technical divergence and could be a sign that the stock is about to move higher. (Read more in Getting to Know Oscillators: Momentum and Ride The RSI Rollercoaster.)

Aug 27-October 27, Covidien Technical Summary

Mastercard's chart is very similar to the one above, hitting support just under $130.00 on increasing strength and a rising stochastic as well.

Aug 27-October 27, Mastercard Technical Summary

The stochastic and RSI confirm that both stocks are oversold. When you put these two factors together we have two stocks that are showing signs of an upward move in a volatile market. (To find out more about these technicals, read Momentum and the Relative Strength Index.)

NYSE Euronext Sturdier than the Market Itself
Next we have NYSE Euronext, which is primarily a valuation play. With all of the concern about what is happening in the credit markets, the company has had its shares sell off more than 70% over the past 52 weeks. The company is trading at a low multiple with a price earnings ratio of 8 compared to the Diversified Investments industry's P/E of 22. Its balance sheet is in good shape with the company having $1.3 billion in cash and $3 billion in debt. Combine this with the fact that shares are trading 15% above the 52-week low of $21.77 and we have a stock with long term growth potential. Yes, there is a lot of uncertainty out there surrounding what is going on with the credit markets; however, when we have situations of fear combined with great valuations and an outstanding balance sheet, these are the ingredients necessary for a strong long-term valuation play.

Bottom Line
When you put the technicals and the fundamentals together, you have the potential to find strong upward movers that could outperform the market. It is important to do your own homework, however. You must also look at the company's balance sheet and how it has been holding up in face of the market weakness. In some cases if the stock hit its low and is showing improving technical indicators this could be a sign that shares have bottomed and are starting to make an upward move again.

For related reading on this strategy, see Blending Technical And Fundamental Analysis.

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