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.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!