Just because a stock is hovering at or around its all-time highs does not mean shares are overvalued and overdue for some sort of correction. Indeed, investors must ask themselves why a certain stock has moved higher.
Is the run driven primarily by multiple expansions, or have earnings been moving at a pace that was higher than expected?
Indeed, I’d much rather buy shares of a name in the latter category, as multiple expansion-driven rallies could accompany shifts in expectation (either for the economy a the company under question) that may or may not be warranted.
Either way, investors should carefully evaluate a stock before even thinking about hitting the buy button!
Momentum stocks with the means to march even higher
In this piece, we’ll have a look at two intriguing momentum stocks that have been hot but could continue flying higher into year’s end. Undoubtedly, there may be a bit of multiple expansion that could help each name extend their respective runs.
Regardless, I like the trajectory of earnings growth, even in the face of potential economic turbulence. Indeed, recession fears have faded a bit, but investors must always be ready to roll with some unforeseen punches, so they won’t be in a spot to be rattled.
Without further ado, let’s consider two momentum stocks that are winners likely to continue winning in the second half of 2023 and perhaps even the first half of 2024.
TSX momentum stock #1: Dollarama
First up, we have Canadian discount retail firm Dollarama (TSX:DOL), which is less than 5% from its all-time high, just shy of $90 per share. The dollar store giant has been doing incredibly well amid inflation and has stood out as one of the top performers in the retail universe. With a 29.5 times trailing price-to-earnings multiple, the stock is priced with growth in mind.
As the company continues expanding across the country, I think Dollarama’s growth multiple is more than justified. Further, Dollarama is one of few companies that can keep growing, even as the economic tides go out. As a proven defensive growth firm, I’d not bet against the company, even as the market’s appetite for risk increases.
Just a few weeks ago, Dollarama’s chief financial officer JP Towner announced his decision to leave the company. Indeed, Towner’s departure has left some investors scratching their heads. Regardless, I think the exit isn’t as big a deal as the initial reaction (the stock immediately slipped nearly 2% on the news) implied.
TSX momentum stock #2: Hydro One
Hydro One (TSX:H) is another defensive stock that can perform without help from the broader market. The stock is lowly correlated to the broader TSX Index with its mere 0.26 beta, with a nice 3.28% dividend yield, and a monopolistic position in the province of Ontario. Indeed, Hydro One is a great bond proxy for investors who may be a tad worried about stretched broader market valuations.
At 21.25 times trailing price to earnings, you’re paying a premium relative to some other high-yield utility plays. Still, given Hydro One’s dominant position in its market, I’d argue a higher multiple is warranted. Either way, investors are likely to get the perfect mix of capital gains and dividends from the name over the long run.
Better buy: DOL or H stock?
I like Dollarama stock more here for the long-term earnings-growth potential. Sure, you won’t get a fat dividend yield, but you are getting a pretty resilient growth profile. If you’re young and don’t need passive income, DOL stock should be preferred over H stock.
