Plunging U.S. interest rates this year have fired up momentum stocks, which have dramatically outperformed stocks that are driven soley by fundamentals. The 10 best three-month performers in the S&P 500 at the end 2018, for example, have soared 32% this year.
But with stocks now sitting near record highs, pure momentum investing may not be wise. Instead, investors seeking big gains might look at stocks with two characteristics: they are inexpensive and also show recent price momentum. These picks include stocks of “flawed companies” that have demonstrated signs of improvement, such as McKesson Corp. (MCK), AT&T Inc. (T), and D.R. Horton Inc. (DHI). All three have beaten the broader market year-to-date and may rise higher due to their low valuations, according to a detailed story in Barron’s as outlined below.
McKesson's, AT&T, and D.R. Horton's foreword PE are 9.3, 10.3 and 10.9, respectively, per Yahoo Finance, dramatically below the S&P 500, which traded at around 16.7 at the end of last week.
Below, Investopedia takes a close look at each of these stocks.
D.R. Horton is poised to benefit from an increase in Millennial home buyers as they reach their prime purchasing age, per Barron’s. Twenty nine million Millennials looking for homes will outnumber the baby boomer peak four decades ago by three million.
In July, J.R. Horton saw its shares jump on third quarter results that exceeded the consensus estimate. Analysts at firms including Jefferies and Wedbush expect that momentum to continue for the homebuilding company, thanks to factors including demographics, low interest rates, and improved housing affordability, per another Barron’s report.
Jefferies equity strategist Sean Darby notes that trade tensions and expectations of the Fed’s next moves have brought Treasury rates and, as a result, mortgage rates, to new lows. He sees continued strength in the sector. Shares of D.R. Horton are up 44.1% YTD.
McKesson, one of the largest distributors of pharmaceutical drugs in the U.S., has seen its stock gain 29.3% YTD. Last month, investors rallied around an earnings beat, boosting shares of the once battered company. In recent years, McKesson and its peers have struggled with lower prescription drug prices, a series of lawsuits and scandals surrounding the opioid crisis, and uncertainty over drug pricing reform. These headwinds seem to be subsiding, as McKesson raised guidance in August for the current fiscal year.
AT&T's shares haves risen sharply this year and spiked again this summer on better than expected second quarter results and guidance for 2019. Skepticism about AT&T may provide a buying opportunity. In the company's second quarter report, the company lost nearly one million pay-TV customers but saw strength in its highly profitable wireless and media businesses, which helped to offset these losses. Many investors are bullish on the telecom and entertainment company's move into the media space, taking on debt in order to buy assets from Time Warner Inc. and launch its on-demand streaming service HBO Max. The strategy is viewed by many as superior to that of rival Verizon Communications Inc. (VZ), which has focused on its core wireless segment. AT&T's aggressive strategy is expected to continue to lift shares, up 30.3% YTD.
To be sure, this strategy of buying low-valuation stocks is no guarantee of success. With the market near record highs, some investors are forecasting a sharp pullback in the overall market. If that happens, these bargain blue chips are likely to fall with them.