Written by Joey Frenette at The Motley Fool Canada
There’s a difference between investing in momentum, or chasing hot stocks, and buying undervalued stocks that happen to have impressive performance in the rear view mirror. Indeed, I’m not a fan of the all-time best list, especially after big moves.
Undoubtedly, most other value investors are more likely to feel like they missed a race. Like it or not, the greatest descents are sometimes followed by the steepest declines.
Dynamic investing goes both ways
Dynamic investing can be a double-edged sword. That said, stocks shouldn’t be avoided just because they’ve done well over the past month or year, as long as the fundamentals are still strong and your financial models are telling you that a stock isn’t doing well. is not yet fully appreciated. Anytime you have a stock whose market price is below its intrinsic value range, you can have an intriguing value game on your hands, and that’s independent of recent price action.
On the other hand, waiting for a correction or decline in a stock you are monitoring can also be a bad thing. This can result in missed opportunities. Indeed, when the stock market drops significantly, many may be inclined to put off buying, even if the price of a stock is much lower than they would be willing to pay. Yes, stock market crashes have bad news behind them.
Depending on the severity of the news, long-term fundamentals may suffer. That said, most of the time, market swings are less important to the longer-term narrative, and that’s where the real opportunity lies. Remember that an analyst lowering their price target on a stock after the fact should not prompt you to follow suit, lower the bar and postpone any purchases you would otherwise have made!
Momentum and value together?
In this article, we’ll look at an intriguing stock that has solid price action behind it, but also looks cheap on my books. Consider Bank of Montreal (TSX:BMO)(NYSE:BMO), a well-run Canadian bank that has just acquired Bank of the West in a landmark transaction. Heading into 2022, it could have been argued that BMO was the best bank for your money. The company recorded an incredible 25% dividend increase, a sign of confidence in management. Although the increase was substantial, I don’t think investors are giving the big blue as much respect as it deserves after another incredible year.
BMO is not just another Big Six bank. I think it’s a much more dynamic bank for a very reasonable entry price. No doubt BMO will be busy making Bank of the West its own. Given its capable managers and the tailwinds of higher rates and robust economic growth in Canada, I find it really difficult to pass the stock after a modest 4% drop. After last week’s strength, BMO is down just north of 2% from its peak. It’s not really a “sale”. However, given the low multiple of 11.5 times earnings, one could argue that BMO shares are incredibly cheap and a buy despite last year’s 33% gain.
To put it simply, BMO stock got a little cheaper amid its wonderful rally. And I wouldn’t hesitate to buy even more stocks given the growth profile, which I find among the best of the Big Six.
At the end of the line
Remember the saying, past performance does not guarantee future performance. A strong action in the rear sight does not suggest more strength to come.
On the other hand, however, a strong action does not indicate a poor performance ahead of you either. Take-out? Focus more on the valuation of a stock rather than its momentum. The two are not mutually exclusive. In fact, it might be better to have both together under one name!
Post 1 Soaring Financial Stock I would buy going up! appeared first on The Motley Fool Canada.
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Contributor fool Joey Frenette owns the BANK OF MONTREAL. The Motley Fool has no position in the stocks mentioned.