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: 2.3%
- Longs: 5.1%
- Shorts: -2.8%
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||UBER||Uber Technologies Inc.|
|2||WKHS||Workhorse Group Inc.|
|4||ARC||ARC Document Solutions Inc.|
|6||DADA||Dada Nexus Limited|
|7||UPST||Upstart Holdings Inc.|
|8||FRHC||Freedom Holding Corp.|
|9||UAL||United Airlines Holdings Inc.|
|10||SPG||Simon Property Group Inc.|
|12||AEO||American Eagle Outfitters Inc.|
|13||LPRO||Open Lending Corporation|
|15||NUAN||Nuance Communications Inc.|
|16||ATEC||Alphatec Holdings Inc.|
|17||WSC||WillScot Mobile Mini Holdings Corp.|
|18||GDS||GDS Holdings Limited|
|19||ALGM||Allegro MicroSystems Inc.|
|20||TME||Tencent Music Entertainment Group|
|1||ZM||Zoom Video Communications Inc.|
|7||TAL||TAL Education Group|
|8||COST||Costco Wholesale Corp.|
|9||GTN||Gray Television Inc.|
|10||AVB||AvalonBay Communities Inc.|
|11||DLR||Digital Realty Trust Inc.|
|12||CAG||Conagra Brands Inc.|
|13||SJM||The J.M. Smucker Company|
|14||CPB||Campbell Soup Company|
|15||RBA||Ritchie Bros Auctioneers Inc.|
|18||WEN||The Wendy’s Company|
|19||CCK||Crown Holdings Inc.|
Trends visible in stocks for next week list
Retail and small investors have led this rally, marked change from earlier rallies when institutions would lead, chased by the small investors. Retail investors are still leading, but it seems that institutions are not chasing the retail names as aggressively any more given how quickly some of stocks pops gave up their gains.
Instead, some of the comeback and restructuring stories have offered the most excitement over the past few days, e.g. GameStop, a name that I have been bullish on for a while, or some of the softline retail names that came out with their holiday sales numbers, which were cheered by the Street.
Breadth of the rally seems to be fading. Once again, most valuation metrics are supporting a bigger shift towards value names, while a lot of quantitative metrics are suggesting that growth still has some room to run. I will look for confirmation in the upcoming earnings season.
Action may have shifted to selective small and medium caps, but it might be a mistake to give up on large caps too early given increase in volatility and faster earnings recovery may bring them back in fashion.
Homebuilders look exciting around current levels. 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.
Semiconductor equipment names are showing up high on my screens, not surprising given high utilization rates at most fabs and demand for semiconductors staying strong. Besides economic recovery, semiconductor manufacturers should benefit from improved pricing power and resulting increase in gross margins soon.
Auto dealership stocks have worked well over the last few months, with help from production cuts at auto manufacturers and demand for used autos increasing. Fundamentals, after updating my models, suggest margin improvement is holding up at these companies, which may lead to another leg of the rally in the sector stocks.
Once again, construction equipment rental names, i.e. United Rentals and Herc Holdings, look good. Improving demand, tight capacity and lean cost structure should lead to better pricing power and strong margins, leading sharp increase in earnings per share.
Retail stocks are working again and I have been bullish on the sector but I would avoid chasing the names. Fundamentals are yet not supporting a major rally. Market may soon have to get its arm around the lack of earnings growth post holiday sales.
As mentioned over the previous few weeks, restaurant stocks look vulnerable. Yes, 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.
Square and PayPal have been drawing strong interest from investors due to strong rally in crypto currencies, but most payment processing names are showing up low on my screens. Fundamentally, 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.
I am not a big fan of REITs right now, as evident from last few weekly notes. Some retail REITs may be starting to show signs of stability, i.e. names like Simon Property that is included in this week’s positive list, but my screens are suggesting that it might still be a bit too early to call it a full blown comeback.
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.