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For investors seeking strong and fast returns on the stock market, the key is typically investing in undervalued stocks with momentum.
In other words, we want stocks with low growth-adjusted earnings multiples and the share price is already going up.
However, today, the stock market is hot. Indexes around the world are at record highs. In places, the market is looking a little too hot — stocks have to work hard to justify valuations.
With that in mind, I’m not stopping investing. I’m just investing slightly differently.
Of course, the focus should still be on finding undervalued stocks. But instead I’m looking more closely at companies that have suffered from poor momentum.
What’s behind the change?
So, why is that?
Sometimes, when stocks fall, the valuation isn’t the most important thing. It’s the perception. And if a stock has run up a long way, it can fall just as fast.
Overlooked stocks may become more popular if investors start to sell hot stocks and seek relative safety.
One stock that has already been through this cycle, and has since seen it’s share price cool off is Sezzle (NASDAQ:SEZL).
The buy-now-pay-later provider currently trades around 24 times forward earnings. That’s a 120% premium to the finance sector, but a considerable discount to the likes of Affirm Holdings.
This price-to-earnings (P/E) ratio is expected to fall to 18 times for 2026 and then 15 times for 2027. It also has a strong balance sheet.
Of course, there’s very little point comparing Sezzle to a financial services company because its margins are exceptional.
The Rule of 40 is a quick way to gauge how efficiently a software company grows. It adds revenue growth to profit margin — and anything above 40% is considered impressive.
Sezzle isn’t just clearing that bar, it’s smashing it.
The firm’s recent performance sits around a score above 130. That’s an extraordinary feat in a high-interest-rate environment where many growth stocks still struggle.
For comparison, Palantir — one of the market’s standout growth stories — runs at about 25% revenue growth and a 20% operating margin.
It’s a much larger business, but Sezzle’s strength is remarkable given how little attention it gets.
It could quietly be shaping up as one of the most exciting growth stories of the next few years.
The risks? Well, as a business it could experience weakness if the US consumer comes under pressure.
However, I absolutely believe other investors should consider it. Having shed 50% of its valuation, it really doesn’t look expensive now to me.
It’s not a hard and fast rule
Of course, every investment is different.
There are several stocks in my portfolio at all-time highs, which I still like. This includes Micron and Nvidia.
However, my preference is certainly for stocks that appear more overlooked in recent months.
This is the likes of the London Stock Exchange Group, Jet2 and even Hikma. Even in a hot market, there’s plenty of opportunity.
This story originally appeared on Motley Fool
