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 1375 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: 7.6%
- Longs: -0.8%
- Shorts: 8.4%
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||RKT||Rocket Companies Inc.|
|2||WKHS||Workhorse Group Inc.|
|4||ARC||ARC Document Solutions Inc.|
|6||UAL||United Airlines Holdings Inc.|
|7||DAL||Delta Air Lines Inc.|
|10||MGA||Magna International Inc.|
|12||UBER||Uber Technologies Inc.|
|13||PLCE||The Children’s Place Inc.|
|14||RRR||Red Rock Resorts Inc.|
|15||ENVA||Enova International Inc.|
|17||SIG||Signet Jewelers Limited|
|18||AEO||American Eagle Outfitters Inc.|
|20||ACEL||Accel Entertainment Inc.|
|1||ZM||Zoom Video Communications Inc.|
|5||PTON||Peloton Interactive Inc.|
|6||TDOC||Teladoc Health Inc.|
|9||WOOF||Petco Health and Wellness Company Inc.|
|11||ORA||Ormat Technologies Inc.|
|12||BOOT||Boot Barn Holdings Inc.|
|17||ACB||Aurora Cannabis Inc.|
|19||DNMR||Danimer Scientific Inc.|
|20||MGPI||MGP Ingredients Inc.|
Trends visible in stocks for next week list
The great value awakening! This is how I understood the market this past week. Amid all the noise around ‘correction’ and ‘crash’, it is easy to forget that the market is barely down 10-12% from all time high. Yes, high beta growth stokes were taken to the cleaners, which is where the action was this past year.
Given how wide the valuation differential was between high growth tech and the rest of the market was, this was somewhat expected and earnings reports merely accelerated the shift. Since a lot of these high beta tech names and SPACs were trading at ridiculous valuations, it is natural for institutions to use them as source of capital, but calling it the end of cycle for growth stocks may be an exaggeration.
For a while now, market seems to be confused about when to make the full-fledged shift towards ‘post vaccine’ trade and looking at the commodity markets, interest rates and forward guidance from a lot of the companies, the timing may be now.
Another major shift visible is that investors, both retail and institutional, have finally waken up to the impact of inflation and interest rates on the businesses. How it will impact leveraged balance sheets and valuation multiples are not that difficult to guess. All in all, watch what you are paying for besides what you are buying.
Rocket, UWM Holdings and other mortgage related stocks haven’t shown much enthusiasm to the phenomenal earnings reported. This was partly because investors are nervous about interest rates shooting higher and killing the refinancing demand. The argument is valid but overblown and investors will be forced to look at the names given the stocks are trading at 5-15x next year’s earnings with Street expecting revenue declining for this year and next. In the meantime, companies are growing topline at 100%+. Fundamentally the businesses continue to do well and industry demand equation looks sound. The mismatch between stock prices and fundamentals is making the space extremely attractive.
Travel related names, including airlines, are starting to look good. Yes, travel restrictions may not go away this year but the valuation, at least for companies with higher quality balance sheets, is looking relatively attractive. As the market starts to focus on next year’s numbers, a lot of these names will stand out, delivering high growth, improving profitability and trading at a discount to historical valuations.
Once again, retail, both online and offline, has been one of the sectors that stood well during the past few days when almost everything was getting destroyed. Fundamentally, online players, including Wayfair and Amazon, have consolidated over the past few weeks, while offline players are benefiting from holiday season and pent-up demand after the lockdown eased up.
If your portfolio is heavy on high beta tech, EV, SPAC, semiconductor, etc. you will have scars to show from this past week’s damage. My screens continue to warn me against catching the falling knife. Yes, there are a lot of quality names that got punished, but relatively most names look rich and results are forcing Street to adjust trading multiples assigned to the space.
Large caps are just first in line; beware of hiding in small and medium caps. Yes, small-medium cap names held up relatively well but that might be due to poor liquidity and investors ignoring them while running to raise cash quickly. I will be cautious though. Earnings may become an issue for a lot of these. Consolidating market, lack of growth and availability of better bargains in large cap space may continue to put pressure on these small-medium cap names.
Last week, emerging markets names were not spared either. Yes, a lot of Chinese and Brazilian stocks continue to show great topline growth, but unless the bond yields stabilize, most of these names may not do much.
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.