Every week, our model comes up with 40 stocks, 20 positive and 20 negatives, to watch for next week’s trading. The model is based on a mix of fundamental and quantitative factors, built on my proprietary database of detailed earnings model on more than 1350 U.S. listed companies. The historical data for these earnings models is sourced from SEC filings.
Performance of last week’s model portfolio for the week was,
- Net: 2.8%
- Longs: -0.1%
- Shorts: 2.9%
Assuming 5% is dedicated to each position, resulting in 0% net exposure and no change in position size during the week.
Here are the names that came up for next week,
|1||DADA||Dada Nexus Limited|
|2||WKHS||Workhorse Group Inc.|
|4||ARC||ARC Document Solutions Inc.|
|5||RAD||Rite Aid Corporation|
|6||SNCR||Synchronoss Technologies Inc.|
|7||YALA||Yalla Group Limited|
|8||QFIN||360 DigiTech Inc.|
|10||IIPR||Innovative Industrial Properties Inc.|
|11||WBA||Walgreens Boots Alliance Inc.|
|12||MGI||MoneyGram International Inc.|
|13||SPT||Sprout Social Inc.|
|14||ATEC||Alphatec Holdings Inc.|
|16||ONEM||1Life Healthcare Inc.|
|18||PLCE||The Children’s Place Inc.|
|19||PERI||Perion Network Ltd.|
|20||FLGT||Fulgent Genetics Inc.|
|3||EPAY||Bottomline Technologies Inc.|
|4||ARCE||Arco Platform Limited|
|5||COST||Costco Wholesale Corp.|
|9||EPAC||Enerpac Tool Group Corp.|
|10||PRO||PROS Holdings Inc.|
|11||BRP||BRP Group Inc.|
|12||CAG||Conagra Brands Inc.|
|14||ENR||Energizer Holdings Inc.|
|16||CLI||Mack-Cali Realty Corporation|
|17||RBA||Ritchie Bros Auctioneers Inc.|
|19||UPS||United Parcel Service Inc.|
Trends visible in stocks for next week list
Few years down the road, this rally will be defined by stocks like GameStop, a name that I have been bullish on for a while, and Tesla. Even the staunchest of Bulls would agree that much of the gains for both these companies are behind and the recent loss of momentum is something to be wary off. Anytime the leading stocks of the rally turn weak, I put my hard hat on.
The flavor of the past few weeks has been – burn the shorts. With such consensus trading happening, better to stick to large caps for shorts, which is what my screens are telling me as well. As for shorts, better to avoid playing for the fences and avoid betting big against potential bankruptcy cases. Yes, near all-time low interest rates are partly to blame.
Once again, results are starting to pour in and volatility is bound to increase over the coming weeks. Quantitatively, size of market cap and average volume traded matters more while booking profits, which may lead to investors booking profits on some of the larger cap higher beta names before gunning for small and medium cap names.
Yes, short squeeze is one major part of the story, but the market seems to be in mood to overpay for safety, which is why playing intra sector valuation arbitrage may not be the best strategy for now. Instead, Even though some of the left out names in hot sectors are starting to show life again, case in point Workhorse Group this past week.
I have been bullish on Chinese ADRs for the past few weeks and this week is no different. Chinese Fintech companies haven’t participated in the rally, but that may change now given many companies have successfully transitioned their business models away from managing credit risks and acting more as an intermediary between customer and banks, thus more of a tech company and less provisioning for losses on the books. These companies are trading at a significant discount to similar businesses based out of the US.
Healthcare sector is looking good. Even though there aren’t very many healthcare names in my database, but a lot of them are showing up high on my screens. Results continue to be strong and revenue growth seems to be accelerating. Yes, qualitatively, it is a good safety trade as well and one of the few spots in the market where growth is not outrageously priced, both relative to other sectors as well as historical trends.
Some of the REITs, especially housing related ones seem to be bottoming out. Somewhat related, I have been bullish on homebuilders as well for the past few weeks. Fundamentals have continued to improve but stocks haven’t done much, relatively. Bears have continued to shrug off business strength to temporary reasons, including Fed interventions, stimulus and low interest rates. The gap between fundamentals and quantitative performance may start to close soon.
Both semiconductor food chain and auto retailers, sectors I have been bullish for the past few weeks, continue to look good, even though there aren’t very many names from the sector in this week’s positive list. Fundamentals, both macro and micro, continue to be strong with economic recovery gaining pace, improved pricing power and resulting increase in gross margins.
Payment processors are showing up very high on my negative screens. There are three names on this week’s negative list. Fundamentally, growth is collapsing for the sector, whether one compare the names to other high growth pockets of tech or new age processors like Square and Paypal. Competition, especially in the US, is increasing and sector leadership may undergo change. With weak long-term growth prospects, valuation multiples may come under pressure. Quantitatively, the stocks seem to be breaking down and there is still some more downside as stocks are readjusted for lower trading multiples.
Once again, restaurant stocks seem to be breaking down. As mentioned earlier, the third wave of Covid-19 cases is partly to blame but the stocks went up too fast in anticipation of the recovery as well. Initially, the businesses cut costs aggressively, which helped, improved the margins but most of those gains do not seem enough to offset the weak sales and rich valuation.
Logistics and consumer staples are other two sectors where the companies saw revenue and margin benefits from the lockdown and most of those benefits have dissipated while the valuations are trailing near all-time highs and as valuations adjust back to normal industry fundamentals, stocks may see correction.
Have a great weekend and happy hunting!
DISCLAIMER: These are NOT investment recommendations. Please do your research and consult your financial advisor before making any investment decision.