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Last week, I did a deep dive into my single stock quantitative selection model that I call ERM. As discussed in this week’s Whispers note, this process has increased my level of bearishness.  The equity market continues to bounce around on each piece of released macro news, but as we are about to begin the 2Q22 earnings season, the focus will begin to shift from macro back towards micro and idiosyncratic news as Corporate America is set to announce their results for the quarter just ended.  Based on my research, I expect that the forward guidance provided by management teams will be on the soft side and relatively weaker than the commentary during the 1Q22 reporting period.  Thus, it would not be surprising to see the ASM indicator for the S&P 500 fall even further, as I have been writing about for a few months, which has and will continue creating significant headwinds to sustainable rallies in the equity market. 

My key metrics continue to suggest that that the Fed is likely to keep tightening until a clear 3-5 month trend of moderating inflation and a weakening labor market emerges. Hence, we are skeptical of forecasts that are already calling for the central bank to begin easing any time soon, especially considering the recent upside surprises in both the recent releases of the Employment and CPI reports.  Granted, at some point, the pace of tightenings will slow, then a move to data dependent, that then evolves into an end of action by the central bank.  Importantly, however, it is my view that the bar for easing is quite high, and it remains to be seen whether Chair Powell and Gang will actually get there.  So, I hate to be the resident bear, but the totality of my work makes it quite challenging to forecast a sustainable rising equity market until a max negative ASM reading is achieved and there is some strong evidence that the Fed may move back to accommodation. Economic growth fears will almost certainly continue to become more widespread as we move towards year end, especially since there doesn’t appear to be any near-term resolution to geopolitical risks.

• Although some forecasters are beginning to hope for Fed cuts, monetary policy is still moving towards tightening and I still hold the view that Chair Powell and the FOMC will not turn dovish as soon as some expect, which will likely disappoint the equity market.
• Fears of economic slowing and negative earnings revisions to the forward outlook are happening and likely to begin picking up speed as we are still in the early phases.
• It is NOT time to shift positioning to the “other” side, and my indicators are still signaling that oversold tactical rallies are likely to fail.
• Expectations for a great buying opportunity are still at a high level, and investors should be starting to identify candidates for their wish list.

Of course, during such an environment as we’ve been faced with, it is tough to pick stocks that can achieve absolute positive performance. During periods of elevated volatility and macro risk, the portion of the stock risk tied to the market goes up and idiosyncratic factors become less important. However, as I’ve been repeatedly saying, the earnings cuts in “sick-licals” are likely going to be hit the most. As far as my Dunks stock list goes, these companies have been specifically selected because the methodology that I adhere to states that they are likely to OUTPERFORM over time. Remember, my Dunks and Midrange Jumpers are expected to outperform over a 6, 12, and 18-month period. Along that path, there are nearly always bumpy patches and I try to advise good risk management, patience, and a keen eye looking for opportunities that are going to occur on the horizon. 

Bottom line: As discussed for the last several months, my key indicators are still tilting clearly towards risk and downside potential. I reiterate that my expectations are for the next several months, at minimum, to be challenging and volatile as I reiterate that my next downside target range is 3600-3500.  I am also moving closer to introducing an even lower forecast in the near future. Hence, I continue to stress that investors need to be fully aware of their overall risk exposures as well as their positioning, especially if you are sensitive to short-term drawdowns. As has been the case for several months, my updated recommendations continue moving further in lowering offensive exposure and raising defensive weightings.

Before I provide some brief updates on the Dunks list, I want to invite everyone to attend my first live idea webinar that I am doing tomorrow, July 14^th @ 3pm.  On the call, I will be providing a quick macro/market update, and the top requested sectors/stocks that were requested by our members.  I hope you can make it. 

DUNKS

Today is Amazon Prime Day, which has historically been a positive catalyst for the company’s sales and stock price. The firm has been struggling during the year and has dropped significantly in 2022. Historically, the holiday hasn’t been a huge catalyst for the stock. Amazon is currently trading well below its 5-year average in terms of its multiple, but it still has one of the highest multiples in the market. The massive real economy side of the business is still facing pressures, but the fast-growing AWS (cloud) segment continues to lead the industry. Most analysts still like Amazon and expect it to continue to be the leader in both e-commerce and public cloud.

This stock has been near the top of Dunks’ selection leaderboard but has had a harder time recently as energy related names have seen some profit taking and cyclical fears have emerged.  The company is the world’s largest publicly traded uranium company and the second biggest uranium producer as it produces nearly 20% of global supply. The continuing energy transition and the energy crisis associated with Russia’s invasion of Ukraine are key secular catalysts for increasing use of nuclear energy. This driver should mean the company will likely grow revenue and EPS at a healthy clip. My work suggests that CCJ is a solid secular idea that will have bouts of tactical weakness along the way that create opportunities to increase exposure, and while its key indicators are supportive we will stay favorable on this idea.   

This is the Dunk’s List newest addition. It has been an outperformer during 2022, and it reflects a combination of my unfavorable market view, a traditionally non-cyclical defensive name, and a healthy set of indicators.  Indeed, as the average company in the S&P 500 is now seeing its forward profit expectation lowered, CBP recently raised its forward guidance for both earnings and revenues. 

RTX has a solid backlog of orders that will likely keep the wind at its back as it is a key producer of many weapons systems being supplied by the West to the Ukrainians. The company is a leader in the Defense Industry and my proprietary earnings revision work remains positive on the name. Given the current geopolitical backdrop and the expectations of status quo for now, it remains quite likely that the US defense budget, one of the primary drivers of this company’s revenues, will stay at healthy levels to the benefit of Raytheon. 

Mid-Range Jumpers

This company is a great defensive name and, with its 2.2% dividend, continues to do its job as a relative outperformer during a challenging overall equity market environment.   AMT is the dominant player in the cell tower REIT space that has competitive advantages because of its size and scale, which has helped it create a formidable competitive moat.  The company has long-term contracts with major telecom companies, including Verizon Communications (VZ), and its users have high switching costs that make this Real Estate name have a consistent mix of revenues, which should allow AMT to grow at double-digits for the next several years while the average S&P 500 name is seeing its forward profit expectations lowered as GDP concerns become more widespread.  A favorable indicator backdrop continues to suggest that the stock continues to have a positive reward/risk outlook. 

Intuitive Surgical has been a disappointment thus far during 2022 since it was added to my list.  It has been hit along with many other growth and high P/E multiple stocks as monetary policy has provided the negative catalyst.  With that being said, the company still has a favorable indicator set up and its strong secular story is still very much intact.  ISRG’s dominant position in the robotic-assisted surgical technology space remains and some may argue is getting even stronger.  Its da Vinci surgical system has nearly 7,000 systems running globally and creates a healthy stream of recurring revenues after the initial sale that is set to grow nicely as the U.S. and other population centers continue aging, which will undoubtedly keep the demands for surgeries at robust levels.  With my expectation for the underperformance of Growth names nearly completed, ISRG is well positioned to provide healthy relative gains for the next 12-18 months, and recent weakness is an attractive opportunity to raise exposure.