Hedge funds are missing out on momentum plays, providing retail investors with unique opportunities
The stock market’s scintillating form during the past year has surprised many. Although usually up to the task, various hedge funds failed to position for the year-over-year stock market surge, leaving them watching on from the sidelines.
Numerous stocks have delivered stellar year-over-year returns, outperforming the market by some distance. Sure, many of them have run their course, but a few momentum plays remain on offer.
With the aforementioned in mind, I decided to pick out three best-in-class stocks that hedge funds would envy. I thoroughly believe my picks are momentum plays; therefore, alignment exists between retrospective and prospective returns.
Without further ado, here are three market beaters to consider.
Chipotle Mexican Grill (CMG)
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Although Bill Ackman’s Pershing Squared communicated its bullish outlook in late 2022, most hedge funds looked past CMG (NYSE:CMG) stock prior to its latest rally. CMG stock has surged by nearly 80% year-over-year, placing it near the top of the momentum stock list. The stock’s relative strength index reads above 80, meaning question marks exist regarding CMG’s sustainability. However, I think it has additional room to roam into; here’s why.
Chipotle’s comparable store sales continue to show robust growth. The company’s fourth-quarter results conveyed same-store sales of 8.4% year-over-year, which coalesced with an 80 basis point operating profit margin expansion to enhance shareholder value. Despite battling waning consumer confidence, Chipotle’s sales growth remains immaculate, lending it the latitude to open up to 315 new restaurants in 2024. Moreover, Chipotle’s labor cost is set to diminish, given the year-over-year slowdown in global inflation. In essence, Chipotle is a margin expansion story.
Investors are concerned by Chipotle’s price multiples. For example, CMG has a GAAP price-to-earnings ratio of 65.52x. However, its earnings-per-share is projected to expand by more than 18% by December. As such, it’s fair to say that CMG stock is a secular growth opportunity.
Netflix Inc. (NFLX)
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Netflix’s (NASDAQ:NFLX) stock price has doubled in the past year. Okay, it has to be admitted that a broad-based high-beta stock surge played a big part. However, key metrics indicate that NFLX is set for perpetual growth.
Evercore (NYSE:EVR) recently touted Netflix as a top momentum pick. More specifically, Evercore’s Mark Mahaney stated that “subscription and advertising based video on demand continues to drive gross adds incrementality for Netflix, and is also increasingly becoming an anti-churn lever in the U.S.”
I concur with Mahaney’s outlook. However, an additional factor is worth looking at. Netflix’s strong brand name gives it leverage to enter emerging markets such as Asia, Latin America, and Africa. For example, Netflix is projected to corner 39% of Africa’s market by 2026, adding diversity to its revenue mix. This allows Netflix to scale and deflect rising competition in developed markets.
Netflix delivered a respectable fourth-quarter earnings report, beating revenue estimates by $120 million. Even though its earnings fell short by 11 cents per share, Netflix’s forward price-to-earnings-growth ratio of 1.23x is at a five-year discount. As such, I label NFLX stock a growth-at-a-reasonable-price (GARP) opportunity.
Limbach Holdings (LMB)
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Limbach Holdings (NASDAQ:LMB) is a little-known building systems solutions firm with immense potential. LMB stock is up by more than 1.6x year-over-year, but the scary thing is that it remains underpriced. LMB stock has a price-to-earnings-growth ratio of merely 0.14x and a price-to-sales ratio of only 0.93x. Moreover, LMB stock has a put/call ratio of 0.43, meaning options traders favor it.
I’ve mentioned Limbach’s quantitative data points but let’s get stuck into a few fundamental aspects.
The company recently delivered a comprehensive earnings report. Limbach’s fourth-quarter revenue beat estimates by $13.32 million, and its earnings-per-share settled four cents above target.
Furthermore, investors can anticipate higher capacity in the coming year as Limbach’s recent acquisition of Industrial Air is set to add $30 million in annual revenue. Limbach’s growth by acquisition strategy paves the way for sustainable shareholder value creation, adding allure to its stock.
In a nutshell, Limbach has robust fundamentals, favorable valuation metrics, and sound technical features. I’m all for LMB stock!
On the date of publication, Steve Booyens held an indirect long position in NFLX. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.