In the classic sense of the term, momentum is a view of investing consisting of favoring stocks that have been in a positive trend over the past six and twelve months. At Zonebourse, the momentum certainly includes data relating to the positive trend of the share in the short, medium and long term but above all the revisions of profits and turnover by analysts in the very short term (7 days), in the medium term (4 months) and long-term (12 months), weighted by the visibility of the analysts’ business model and by the divergence of their quantified estimates, assuming that the analysts are rather conservative in their revisions.
During our previous selectionwe had chosen Sanderson Farms, Broadcom, Mitsui & Co, Westlake Corporation, Pason Systems at the end of March 2022. An equally weighted portfolio on these five positions will generate a return of -8.29% versus -16.60% for the MSCI World and -17.69% for the S&P500 (the latter being our reference benchmark in relation to the selection, over the period from 03/31/2022 to 06/30/2022). This outperformance of +9.40% compared to the S&P 500 is explained by the inflation-proof nature of most stocks which directly benefits from the economic situation for Westlake Corporation, Sanderson or Pason or which limits margin losses compared to the rest of the market with Broadcom and Mitsui . The American semiconductor manufacturer Broadcom is the worst performer, dropping -22.95%, while the portfolio is driven by Sanderson Farms in the food sector, which posted +16.64% on the counter in the second quarter.
Let’s take a closer look at the five US stocks selected for the third quarter of 2022 (July to September).
Our “momentum” selection for the next three months:
Here is the display in the virtual portfolio tool:
United Health (UNH)
UnitedHealth Group is one of America’s leading providers of healthcare products and services. Revenues are broken down between health insurance (59.3% of sales), drug insurance plan management services (37.5%) and IT services (3.2%). The action of the largest American health insurer has achieved an incredible stock market performance over the past ten years with a stock increase of 25% per year since 2012 (dividend included). This feat was achieved by a significant increase in margins and turnover coupled with a well-controlled acquisition policy.
The group has leadership in this market. The company supports the US government’s desire to reduce healthcare costs for the general public. However, United has strong pricing power. History has shown that health care is the sector that offers the most recurring results even during major financial crises (2000 and 2008) and during inflation peaks. A resilient sector, therefore, which declines less during crises and also outperforms in a bull market.
Revenue was up 14% year-over-year on the Q1 2022 release. Every earnings release over the past 16 quarters has exceeded analysts’ expectations. Its operating cash flow reached $5.3 billion, enough to cushion the blows in the event of a recession. The disciplined execution of the group’s long-term strategy combined with its obvious qualities of earnings stability – since we continued to heal even in the event of a recession – make it a defensive stock of choice.
Merck & Co (MRK)
Merck & Co is one of the largest pharmaceutical companies in the world. Pharmaceutical stocks are particularly sought after in these troubled times of pressure on corporate margins. They offer a certain visibility thanks to a recurrence of their turnover and pricing power on their customers to maintain stable margins. Operating margins have been rising slightly and above 30% for years.
Merck recently released its quarterly results and the market was happy. Revenue was $15.9 billion, including $3.2 billion from sales of Molnupiravir, the company’s COVID-19 pill. Strength was seen across Merck’s drug portfolio. Excluding Molnupiravir, revenue increased 19% compared to the first quarter of 2021.
While Molnupiravir is a rising star with uncertain long-term potential, the cash cow in Merck’s portfolio remains Keytruda, used for the treatment of numerous tumors. Recent acquisitions meanwhile (Pandion Therapeutics and Acceleron Pharma in 2021) will allow it to accelerate in key markets against autoimmune diseases and heart and lung diseases. The company offers a dividend of 3% per year, a security for investors who are increasingly looking for dividend-paying stocks with the uncertainty of the macro-economic context. The buoyant momentum could continue on this defensive stock.
Another defensive value with recurring results, but this time in telecoms: T-Mobile. The sector has been favored by operators lately because of its defensive nature linked to the stability of its results over time as well as the payment of copious dividends which reassure investors who thus receive income. T-Mobile is the third largest mobile phone operator in the United States, just behind AT&T and Verizon.
The telecom business is certainly an infrastructure-heavy business but with a high moat due to massive capex expenditure to compete with it. Even if sales growth should slow down now that the group has acquired a near leading position in the USA, cash profits should continue to climb at a decent pace. The dividends paid to them should be relatively large.
Raytheon Technologies (RTX)
Raytheon is the world’s largest capitalization in the defense and aerospace sector. It is not a pure player because the company generates 27.4% of its turnover in air navigation systems with its subsidiary Collins Aerospatial, 27% in aeronautics via Pratt & Whitney, which notably manufactures aircraft engines civil and military, 23.1% in the missile and integrated air defense systems segment. They are the ones who manufacture the anti-aircraft missiles Stinger and they co-manufacture with Lockheed Martin anti-tank missiles Javelintwo of the most formidable weapons that Westerners send to Ukraine.
The defense sector is just beginning to revise upwards (analysts are starting to readjust their revisions to revenue and net earnings per share) and the trend should continue according to our estimates. The war in Ukraine has changed the situation in terms of security. Most European countries do not respect the initial objective of 2% of GDP devoted to defence. This 2% readjustment alone would result in a 25% increase in the global defense budget. The sector as a whole should therefore benefit greatly from these favorable policies.
AutoNation is an automotive retailer in the United States that sells new and used vehicles as well as parts, repair services, auto maintenance, auto finance and auto insurance products.
If we look at theinflation, it does not seem to want to calm down yet. In this environment, AutoNation is the kind of value inflation-proof as explained in This article. In addition, its large share of turnover in spare parts (30%) benefits from shortages of certain new car parts, which provides it with a cushion edging in the event of a severe recession. The stock should do better than other players in the sector.