The whole growth-versus-value investing debate must be one of the dumbest discussions of all time.
That may sound funny coming from someone who uses a value-oriented approach to picking bank stocks, REITs, and closed-end funds. Surely, I of all people believe that value investing works.
It’s true – I do believe it works, and I have proven it does to myself, my clients, and my subscribers for decades.
But that doesn’t mean I think growth investing doesn’t work.
In fact, I have learned over the last decade that a growth investing method I like to call “Twin Momentum” works – and works very well.
Today, let me show you just how well it works – and give you a few Twin Momentum stock plays…
Twin Momentum, the way I use it, means both that the company’s fundamentals are strong, and that the stock has had strong price momentum over the past year.
Over the weekend, I sat down and ran a simple screen that can help us find candidates for a Twin Momentum approach to growth stock investing. I limited the scope to just those companies that have been earnings high returns for their owners on a consistent basis.
Then I wanted to see decent buyback rates over the past five years. The fact that a company has been actively buying back stocks means that after covering all expenses and investing in growth, it had cash left over and was willing to return it to shareholders.
Now we are looking only at companies earning high returns that are also shareholder friendly.
And then I just buy the ones that have shown the highest price momentum over the past year.
This is a simple approach that can be rebalanced quarterly and does not require sitting in front of the screen all day. It handily beats the S&P 500 and even edges out the market-leading NASDAQ 100 index over the last five years, when tech stocks were rocket ships to profits.
It even outperforms in down years like 2018 and 2022. This simple Twin Momentum approach to growth investing was down just 3.29% in 2018, while the S&P 500 dropped by 6.24%. This year, with the S&P 500 down by 20% (as of this writing), the Twin Momentum approach is down just 11.31%.
When I ran this Twin Momentum list last weekend, I came up with some interesting names. It was not the super sexy stocks that made a list. Instead, it was companies that make the products that fulfill our daily needs.
To my wife’s great dismay, one of my favorite road trip spots to stop for a mid-morning breakfast is Cracker Barrel Old Country Store Inc. (CBRL). I do not care a bit for its giant rocking chairs or down-home country store.
I am there for one thing and one thing only: chicken fried steak and eggs.
For my money, Cracker Barrel has the best chicken fried steak and eggs of any chain restaurant in America. I have found better in some of the out-of-the-way diners into which I have dragged my poor bride over the years, but when it comes time to is hit the off-ramp for breakfast or lunch, Cracker Barrel is my go-to choice.
It turns out Cracker Barrel not only makes a mean breakfast, but the company also produces pretty high returns on the cash its shareholders have invested in the business. Over the last ten years, Cracker Barrel has produced an average return on equity of over 30%.
It is also buying back an average of about 1.3% of the company every year. Cracker Barrel recently hiked its dividend back up to the pre-pandemic level of $1.30 a share, giving us a yield of about 3.85%.
The company is definitely shareholder friendly.
Cracker Barrel stock has held up much better than the market in 2022, falling by slightly more than 13%. In the last three months, momentum has accelerated, with the stock rising up more than 17%, while the S&P 500 is down almost 8% over the same timeframe.
Another intriguing company on the Twin Momentum list I pulled is Donaldson Co. Inc. (DCI). Donaldson does not make any fancy technology products. It does not manufacture breakthrough life-saving drugs or medical devices.
It does not even make a great breakfast.
However, you can’t really make any of these things without using some of Donaldson’s products. The company makes air filters that make the clean rooms needed to manufacture semiconductor chips. Its housings and filters are needed to provide sterile-grade air and water for biotechnology research. Filters like Donaldson’s are used to process almost every ingredient in Cracker Barrel’s delicious chicken fried steak.
In fact, there are not too many industries that do not use Donaldson filters for some part of the manufacturing process.
It may sound like a boring business, but this company has delivered an average return on equity of more than 25% to its shareholders for the last decade. It buys back about 1.2% of the company annually and pays a dividend of 1.64%.
The stock has healthy price momentum as well. With the S&P 500 down 20% on the year, Donaldson shares are off by just a little more than 5%.
In the last three months, the stock is up more than 11%, with the index down almost 8%.
These are just two of the Twin Momentum stocks that I found intriguing. The rest of the list for the current portfolio of potential market-beating stocks is:
- Avery Dennison Corp. (AVY)
- Chemed Corp. (CHE)
- Credit Acceptance Corp. (CACC)
- United Rentals Inc. (URI)
- Diamond Hill Investment Group Inc. (DHIL)
- Discover Financial Services (DFS)
- FMC Corp. (FMC)
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