Stocks On My Screen For Week Starting February 8th, 2021

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: 4.5%
• Longs: 11.0%
• Shorts:  -6.5%

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,

Positive

Negative

Trends visible in stocks for next week list

Last week, I talked about how loss of momentum at stocks like GameStop and Tesla can puncture the Bulls enthusiasm. GameStop is already back to Earth and Tesla is also looking tired and requires more fuel, which may only come from results that are strong enough to prove even Bulls conservative. Not a small task given the current valuation.

The market may have moved up a bit higher but the real action has shifted to small and micro caps, space where relatively fewer institutions can participate. So I would err on the side of caution given the liquidity limitations. After all, if you don’t know who’s the patsy, you’re the patsy.

Most of the times, shorts that are easiest to explain are toughest to execute. This is one such market. Either the ‘borrow’ is too expensive, if available, or the float is just not there to fully hedge your portfolio. Add to that the latest threat of retail investor raid, which suggests, it is better to stick to names that are already working and liquid enough. Yeah, not that different portfolio approach from that of longs.

Results are starting to separate winners from losers and will define the next rally leaders. Market is in no mood to accept any slack in terms of sales growth momentum. Companies that are coming up against rally tough comps from last year may not have an easy path over the next few quarters.

Positives

My extremely bullish stance on Chinese ADRs for the past few weeks are working. Even though a lot of names have done well, my screens are telling me that this may be too early to book profits and move on. Most of these companies never participated in the rally and they have to a lot to catch up to. Many of these companies continue to trade at a significant discount to similar businesses based out of the US.

Once again, healthcare names are showing up high on my screens. Results continue to be strong and revenue growth seems to be accelerating. Yes, qualitatively, it may also be 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 names from semiconductor and auto retail food chain continue to look good and may need a push from results to take them higher. Fundamentals, both macro and micro, continue to be strong with economic recovery gaining pace, improved pricing power and resulting increase in gross margins.

Negatives

Covid-19 recovery trade is losing momentum, both fundamentals as well as quantitatively. Pockets of travel related names have been doing well for the past few days, but if fundamentals do not improve fast, market’s enthusiasm about the stocks may fizzle out fast.

Even though MasterCard and Visa held up well over the past few days, payment processors continue to show up on my screens. Once again, 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.

Yet 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.

Once again, 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.