Value stocks with momentum — or “valmentum” — may provide some insulation for portfolios in a market that is volatile and “viciously rotational,” says Evercore ISI’s Julian Emanuel. An environment where inflation is falling but growth is slow has proven in the past to be positive for stocks over the course of the subsequent year, Emanuel said. He screened the Russell 1000 for “valmentum” stocks that he expects will outperform and have characteristics of both growth and value. Stocks on the list have a high level of short interest, as well as good growth momentum and strong free cash flow yield, which is a value trait. “What we’re trying to do is provide investors with sort of an ‘all-weather portfolio,’ given the fact that stock correlations remain historically low, reinforcing the fact that even though it feels like a beta chase it really isn’t. It’s a stock picker’s market,” said Emanuel, who heads Evercore ISI equity, derivatives and quantitative strategy. Emanuel said investors have been excited about the disinflationary theme mentioned last week by Federal Reserve Chairman Jerome Powell . But he also said the fervor around some momentum names could be about to slow. “Last Thursday’s record call volumes mark at least a medium-term speculative peak. It’s heavily concentrated in zero days to expiration options,” he said. Investors in call options on individual stocks are betting that stock will go higher. Zero DTE options are quick bets that expire on the same day. Emanuel said the market will remain volatile as the Fed’s pause in interest rates gets closer. Evercore ISI’s base case is that the central bank will pause in its rate hiking after its March meeting, but Friday’s super strong jobs report with 517,000 jobs created in January makes that a closer call, Emanuel noted. ABNB 1Y line airbnb A Fed pause will not guarantee the market immediately goes higher, since it could also be accompanied by a slowing economy, he said. Emanuel said the consumer staples, consumer discretionary and health care sectors have historically outperformed in a falling inflation environment with slowing growth. Energy is an in-line performer. Evercore ISI screened for stocks with a market cap greater than $10 billion, and estimated free cash flow yield for 2023 above 4.6% The companies also had to have positive 2023 earnings estimates since Sept. 30. Short interest in the stocks was at or above the median range since 2021. BKNG 1Y line booking Airbnb and Booking Holdings are two consumer discretionary stocks that made the “valmentum” list. Airbnb has an estimated free cash flow yield of 5% and expected earnings growth this year of more than 9%. Booking’s free cash flow is expected to be 5.4% this year, and its earnings are expected to grow 26.4%. DE CAT 1Y line industrials Industrial companies on the list include American Airlines and both Deere and Caterpillar. The list also includes General Mills, from the consumer staples sector, and health-care company McKesson. Two energy names that were included are Halliburton and Oneok.
