Momentum Investors Sometimes Win Out: Look For Big Companies In Broad Rising Trends

Momentum investing or buying a stock that has outperformed the market in hopes it continues to do so, is often regarded as a high-risk strategy. The outperforming company’s share price reflects optimism that could easily turn to disappointment at the slightest financial setback, and only continued good news can keep the shares from plunging. 

Some investors are so convinced that the bubble is about to burst that they borrow the shares and sell them short, a risky strategy since they may have to cover their short position by buying the shares at an even higher price.

The opposite, called deep value investing or bottom fishing, involves investing in a company whose shares have fallen to the point where the stock trades at a low price to sales, earnings, cash flow or other fundamental multiples. The deep-value investor must have patience while waiting for a catalyst that will keep the price climbing.

The likeliness of a high-flying stock continuing to rise may be related to how large the company is and how long the shares have outperformed. After all, Sir Isaac Newton (1642-1726) said an object in motion tends to stay in motion and defined momentum is equal to an object’s mass times its velocity. That’s why a giant ship takes longer to slow down or turn around than a rowboat. A widely held, large-cap stock whose share price has been outperforming for a year, for example, may be more likely to continue rising than a tiny company whose shares have recently jumped on a bit of good news.

For example, Nvidia Corp., with a market capitalization (shares times share price) of US$1.35 trillion and Meta Platforms Inc., with a market cap of US$962 billion, are up by 209% and 176%, respectively, over the past year.  Although the pace of price appreciation has slowed since last spring, the companies are so large that many investors would have to lose faith for the stocks to plunge.

Canadian investors will have a long wait to find a Canadian company worth a trillion dollars. The three large Canadian companies mentioned here saw their share prices essentially double in 2023 for widely different reasons. In my opinion, Celestica and Cameco are more likely to keep outperforming the market than to lag it, while Shopify appears overpriced.

Celestica Inc. (CLS)

Toronto-based Celestica is a contract manufacturer that offers its corporate clients a range of manufacturing and supply chain services, including design and development, manufacturing and assembly, testing, fulfilment, logistics, and after-market repair and return services. The company has more than 26,000 employees working from 40 sites in 16 countries. 

Celestica operates in two main segments: advanced technology and connectivity and cloud. Advanced technology, which represents about 40% of its revenue, is made up of its aerospace and defence, industrial, health tech and capital equipment units, while its connectivity and cloud segment, which accounts for about 60% of revenue, is made up of its communications and enterprise (storage and servers). Celestica is gradually shifting its lineup toward more technologically advanced and profitable equipment.

Theompanyy should have revenue of US$7.9 billion in 2023 with a 5.5% operating margin, investors were told in a November 29, 2023 virtual meeting.

Celestica’s share price began climbing last spring, rising from the mid-teens to the $20 range.

In late July, the company reported its second-quarter revenue rose 13% to US$1.94 billion while raising its earnings per share guidance to higher levels than what analysts had expected. The news sent Celestica shares surging up by a third, to about $28 from $21.

Investors were less enthusiastic when the company reported its third-quarter numbers on October 26, when the stock slipped despite strong results. Celestica earned US$78.2 million or US$0.65 per share, up 23% over the same quarter of 2022. Revenue for the quarter was US$2.04 billion, up 16.2% over Q3 2022. The shares bounced back, and as of the end of November 2023, the stock was up about 140% on the year.

Among analysts who follow the company, CFRA’s quantitative stock report rates Celestica as a strong buy with moderate risk, ranking the company at the highest of CFRA’s five possible recommendation levels. Celestica scored high on CFRA’s valuation measure, which looks at price to earnings, price to cash flow and enterprise value to book value, and on its growth measure, which examines the growth and stability of earnings and cash flow. Celestica’s overall score was in the first percentile of all stocks in the model, CFRA said. As of mid-January the stock had a one-year gain of about 118%.

Shopify Inc. (SHOP)

Ottawa-based Shopify is an e-commerce platform that lets small and medium businesses build an online store and sell their goods and services on social media sites, seller marketplaces, and other blogs and websites. The platform offers services including payments, marketing, shipping, and customer engagement tools. Roughly half the company’s 1.75 million online merchants are based in the United States. Shopify has three subscription levels: $51 a month for individuals and small businesses, $132 a month for an intermediate level and $517 for medium to large businesses. A US$2,000-a-month Shopify Plus plan is also available for more sophisticated clients.

In the third quarter of 2023, Shopify earned US$718 million or US$0.55 per diluted share on revenue of US$1.7 billion. The company’s total revenue beat analyst’s estimates, while profit improved dramatically from the same quarter a year ago when it suffered a loss of US$159 million. The improved earnings came thanks to cost-cutting measures that included two rounds of layoffs over the past year, including a summer purge of 20% of its workforce. 

Further savings were realized after Shopify abandoned its fulfilment ambitions last spring, as it sold off its delivery and warehouse operations in a deal with California-based Flexport. For years, Shopify had been investing in fulfilment operations that some analysts viewed as a drag on profitability. Flexport will now be Shopify’s preferred fulfilment partner. 

In early September 2023, Shopify reached a deal with Amazon.com Inc. that will allow U.S. merchants to use Amazon’s Buy with Prime service for their Shopify checkout systems. The improved earnings also included a gain of US$555 million from investments.

Shopify traded at $48.79 at the beginning of 2023. The wise investor who bought then would have begun December with shares worth roughly twice as much. The ride has not been smooth, however. Shopify climbed above $70 in February, fell below $55 in March, soared above $85 in May, touched $90 a couple of times over the summer, slipped below $65 in October, then climbed to end November at more than $100. 

The stock has a beta of 2.08, which means it’s more than twice as volatile as the TSX. Tech giants that indirectly compete with Shopify, such as Amazon.com (AMZN), Salesforce Inc. (CRM) and Oracle Corp. (ORCL), show relatively smooth and steady share price gains when compared to Shopify.

At CAD$100 (US$73), Shopify has a market capitalization of about $128 billion, returning it to the list of Canada’s largest companies along with giant banks Royal and TD. During the pandemic Shopify shares had soared, making it Canada’s largest corporation. The shares peaked in November 2021 and then began a steep slide. The company split its stock 10 for 1 at the end of June 2022, which meant its peak price had been more than $200.

At current prices, Shopify is trading at about 15.7 times sales per share, a far more optimistic level than Amazon's P/S multiple of 2.9 times, Salesforce's 7.9 times and Oracle's 5.7 times.

Cameco Corp. (CCO)

Cameco, based in Saskatoon, has interests in mines and milling operations that can turn out more than 30 million pounds of uranium a year, together with more than 469 million pounds of proven and probable reserves. Along with the giant Cigar Lake uranium mine in northern Saskatchewan, Cameco has a refinery in Blind River, Ontario. The company makes fuel assemblies and reactor components at its facilities in Port Hope and Cobourg, Ontario.

On November 7, 2023, Cameco and Brookfield Asset Management completed their joint acquisition of Westinghouse Electric in a US$8.2 billion deal, giving Cameco a 49% interest and Brookfield 51%.

Cameco shareholders had a solid return from the uranium miner in 2023, whose shares have benefited from the rise in the uranium price. Uranium is up about 40% over the past year and was trading above US$57 a pound in early December, which has helped Cameco shares essentially double since 2022.

The uranium price has benefited from production shortfalls and local bottlenecks that show no sign of abating. Geopolitical events, such as the war in Ukraine and the need to keep energy supplies strong for winter heating in Europe, along with a coup in Niger, a major uranium-producing country, and China’s accelerated construction of nuclear power plants all bode well for the future price of uranium. Protests against uranium mining also may disrupt supply, which has the bizarre effect of increasing the uranium price and benefiting uranium investors.

Although they have followed similar trajectories, Cameco’s shares have outperformed the unit price of the Sprott Physical Uranium Trust (U.UN/TSX). The fund, launched in July 2021, holds 62 million pounds of uranium stored with o0Cameco ConverDyn in the United States and Orano in France.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post. richarddmorrison@yahoo.ca