Our research, which has been developed over two decades of Wall Street experience, strongly suggests that our Dunks Product can add significant value by supplementing the actively managed part of your portfolio. By highlighting individual stocks with high-quality reward risk ratios that over the medium/long-term it is possible to raise the probability of outperforming the overall equity market without taking on excessive amounts of risk.

For those who are less risk-averse, we also present some higher-risk, but often higher-reward opportunities that will be included in the Mid-Range Jumper section of the overall Dunks. Both these stock lists are derived by the models and techniques that we have been producing for professional institutional investors since the 1990s. For the first time ever, I am now making it available to retail investors on FSInsight.com.

Our investment and selection methodologies are grounded in proprietary quantitative analysis and methods that have not only stood the test of time but also have been evolving. Please be aware that, because we are using a quantitative model-based method, we are not doing extensive fundamental and catalyst analysis on the individual names we land on. You should always do additional due diligence before adding a name to your portfolio to ensure it conforms with your individual risk tolerance and investment goals.

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Please note that Brian recently did a Live Webinar where he walked through his sector recommendations and the most popular single stock from our FSI Members and Community. Click here to watch the replay.

Also, Brian has created a short methodology video explaining his sector selection methodology. Click here to watch it!

Market Commentary

I am going to keep my comments on the shorter side this month as my main views are unchanged. The two main factors that originally turned me bearish March/April and have kept me unfavorable, which are 1) a negatively sloped ASM indicator for the S&P 500 that has not reached max pessimism, and 2) a hawkish Fed, are still in place. Thus, my view is that the U.S. equity market still has considerable downside risk and investors should remain mindful of their exposures and on alert for our bullish pivot that is still in front of us.

It should be noted that my aggressive tactical indicators that I have written about in prior publications (HALO-2 & V-Squared) are approaching negative extremes, which suggests that a tactical countertrend bounce for the equity market could start at any time over the next week or two. Yet, I continue to reiterate that my work signals that bounce attempts will likely be short duration, smallish magnitude, and will likely fail into overhead resistance areas. I do not advise strategic accounts to chase them and would use them to sell into, reposition, and raise hedging. Aggressive investors can try to participate, but with the medium-term trend unfavorable based on my research, it will not be an easy task to identify the bottom, build a position, identify the top, and get back out.

The macro backdrop is still quite challenging and a hawkish Fed fighting the highest inflation in decades is not the best setup for healthy equity returns, especially when the global backdrop also has countless issues that will keep investors on their toes for the next several months. So, the question will be, when will all the bad news be OVERLY discounted? Once this occurs, the reward/risk ratio for investors will shift back towards reward and the challenges will remain, but one can then once again start raising their equity allocations. Unfortunately, my work still is signaling that this will likely need more time to be reached.

My earnings revisions work still shows that forward expectations for corporate profits remain too high and still need to be lowered. Additionally, as I have stated many times over the last several months, this matters a lot, especially with Chair Powell and Gang clearly communicating that they have plenty of work to do before they can declare victory in their battle against inflation.

As mentioned in last month’s update, I get asked quite a bit in my regular institutional client meetings what scares me the most about remaining bearish on the equity market, especially when the S&P 500 is already down quite a bit. My biggest area for concern remains that the positioning data does show that there is a lot of bearishness by professional investors, and retail sentiment surveys are also quite negative. Since I am a contrarian at heart, this does keep me a bit anxious, on my toes, and continually scouring my key indicators to see if I need to make any changes to my views.

I remind readers that, my Dunks product is designed to outperform the S&P 500 in any environment, but down markets are challenging for any long-only positioning to achieve this goal as I don’t want to include too many overly defensive and slower growing names. The performance of my picks is lagging the S&P 500 and that is both frustrating and needs to be improved as we move forward. However, I will say that staying close to benchmark will put us in good shape to surge ahead once my models signal calmer seas ahead. I am confident that goal will be reached over time, and I do want to reiterate that my model historically performs well on 6-, 12-, and 18-month time horizons. so let’s stick with the process and we will likely be rewarded for our discipline.

After being involved with the equity markets professionally now for over 25 years, I must pass along that there is sadly no secret technique that will fully ensure that an investor’s long equity money will always post positive returns in shorter-term time periods. Having been in many challenging periods over the years has taught me firsthand invaluable lessons. and helped evolve and enhance my investment process to objectively and successfully navigate the rough seas. Importantly, however, we can mitigate drawdowns by raising cash when we are bearish, use proper sector allocations and skillful stock selection to outperform, but even if executed to perfection. it is hard post absolute gains in down markets.

My research still suggests that there will be an attractive opportunity to aggressively pivot back to bullishness, but it still appears to be in front of us and investors should remain patient, vigilant, and alert for when my indicators flash a bullish signal. During challenging equity market periods like we have been experiencing during 2022, my work shows that keeping with a disciplined, objective process adds value and outperforms over the longer term. If my outlook plays out as my key indicators are indicating, there is still considerable downside risk to the equity market, volatility will remain elevated as the challenging macro backdrop likely needs time to run its course. and it will be critical for investors to stick to a systematic methodology.

Bottom line is that my key indicators remain unfavorable, which historically has led to weak equity market returns. With that being said, there will be tactical countertrend bounces along the way that aggressive accounts can try to play, but for most they should be used to either sell into, reposition, or raise hedges. Therefore, I continue to advise that investors should keep your eyes and focus on the end game as the multi-month outlook is still challenging, and let’s use weak market action and individual stock selloffs opportunistically to raise exposure to great ideas at attractive price levels.

Changes this month

Summary

Analysis

Dunks

AMZN-2.56%  – Amazon ( PLAY )

ASM Indicator: It continues to grind higher, and AMZN’s red bars have also had a minor improvement (i.e., shrinking), which is an important confirmatory piece of evidence. This combination has historically led to outperformance in the subsequent quarters. Thus, the thesis for the stock remains in place.

Brian’s Take: As the S&P 500 has sharply declined since peaking in August, AMZN has held its own and still sits above its June bottom while the index has closed below. In a challenging backdrop consisting of rising interest rates and signs of U.S. economic slowing, my research strongly suggests that the company will weather the storm relatively well and post relative gains for investors over the next 12-18 months.

Commentary: AMZN is the undisputed leader in e-commerce and cloud services through its Amazon Web Services segment. We believe the competitive advantage will be hard for peers to catch up to. The company will likely grow at above-market rates as the importance of cloud and e-commerce continues to increase.

FANG0.57%  – Diamondback Energy ( PLAY )

ASM Indicator: I continue to keep FANG on my radar to remove from the Dunks list as its key indicator has remained stalled. Despite this lack of upward momentum, it has not shown clear weakness. Hence, I will continue to allow the name some leeway as my important metrics are still showing that energy related names have earnings tailwinds and should hold up when other cyclicals have their outlooks slashed in the coming months.

Brian’s Take: The entire Energy sector continues to find it challenging to make new relative highs as economic slowdown concerns are spilling over into crude demand fears. However, my works suggests a high probability that crude prices will likely remain elevated as global supply chains are still struggling. The recent underperformance of FANG and other names within the space has made their 12-18 month outlooks much more attractive as they pulled back from recent highs.

Commentary: This is a well-managed Energy name that should be able to outperform markets and peers and has a tailwind of being in an attractively valued sector.

RTX0.84%  – Raytheon ( PLAY )

ASM Indicator: After the unexpected tumble mentioned in my last update, its key metric has stabilized and its red bars remain small. Consequently, I am willing to continue to give RTX the benefit of the doubt as global conflicts appear to be lingering for the foreseeable future will likely keep orders quite robust.

Brian’s Take: The stock has been a market performer since it was added to the Dunks List. With so many weak stocks during that period, it is a small victory that RTX has held its own and its outlook remains quite attractive. Thus, I continue to view its weak price action during September as an opportunity to raise exposure.

Commentary: Raytheon operates as an aircraft manufacturing company as well as leading defense contractor. Thus, RTX has a diversified mix of commercial aerospace and military exposure and has been increasing its global exposure as well.

CCJ-0.15%  – Cameco Corporation ( PLAY )

ASM Indicator: Its key indicator paused for the first time during 2022, and posted a small red bar. With that being said, the company’s outlook for the next four quarters is expected to ramp up quite sharply and should drive its ASM back to rising in the coming months. Therefore, my 12-18 month favorable view is still in place.

Brian’s Take: Since its recent tactical price peak during mid-September, the stock has retraced some of its gains since its June low. This has occurred as the overall Energy sector has also come under pressure, but CCJ has been outperforming. My work likes CCJ for 12-18 months and continue to view any weakness as an opportunity to keep raising exposure to this secular growth story. Importantly, I still view uranium and CCJ as critical parts of the ongoing electricity needs for most of the developed world as nuclear clearly is going to be part of the ongoing shift away from carbon based energy.

Commentary: The energy transition is happening, but what technology will eventually help bring down carbon solutions without sacrificing quality of the grid? Our research and analysis suggest that nuclear energy will become a more essential part of the world’s solution to evolving clean energy needs.

CPB1.12%  – Campbell Soup ( PLAY )

ASM Indicator: This historical defensive growth company continues to see its key metric stair step its way higher, which is still providing a favorable tailwind for CPB. In addition, its shift to green bars are still present, which is a strong piece of evidence that supports its favorable ASM trend.

Brian’s Take: The stock has done its job during the challenging period for the overall equity market — outperforming and providing a nearly 3.10% yield. My work continues to see CPB as an excellent reward/risk option while the Fed is stilling fighting inflation and equity volatility remains elevated. Once we get back to calmer seas and my outlook once again shifts back to bullish, CPB may have to be removed, but for now I continue to look to the company as a strong relative performer.

Commentary: The company manufactures and markets food products and has two major segments — Americas Simple Meals & Beverages, which includes its retail/food service business as well as its flagship brands like Campbell’s condensed soups, Swanson stocks and broth, Prego Pasta sauce and V8 juices. The second major segment is Global Biscuits & Snacks, which includes flagship brands like Goldfish crackers and Milano cookies.

Mid-Range Jumpers

TPX-1.57%  – Tempur Sealy International ( PLAY )

New Addition

ASM Indicator: Its key metric is still early in its shift towards “less bad” and looks like a classic contrarian entry point. The outlook is negative now, but the next 12-18 months have a high likelihood to show clear improvement.

Brian’s Take: The most recent addition to the Dunks List has held its own since inclusion and has been a small outperformer. The stock has a lot of bad news in its price and its forward forecast looks quite attractive. Thus, I continue to recommend using tactical weakness in the stock as an opportunity to slowly begin putting some new money to work in TPX.

Commentary: Tempur Sealy International is a leading designer, manufacturer, distributor, and retailer of bedding products comprised of both traditional innerspring mattresses and non-innerspring mattresses. Its Tempur, Tempur-Pedic, Sealy, and Stearns & Foster brands are sold in 100-plus countries through retailers such as furniture and department stores, online, wholesale clubs, and through third-party distributors. The US accounts for about 75% of Tempur Sealy’s revenue.

PM2.82%  – Phillip Morris ( PLAY )

ASM Indicator: PM’s key metric is still moving higher and is being supported by shrinking reds bars that appear poised to flip to green before year end. I continue to view this combination as attractive as it has a high historical probability of providing investors with market beating returns over the subsequent 12-18 months.

Brian’s Take: Similar to CPB, the stock is providing a valuable countercyclical exposure with an attractive 5.63% dividend yield. As stated in previous updates, PM’s combination of positive ASM, attractive valuation, and dividend yield continue to flash favorable in my work. While my other work remains unfavorable on the overall equity markets, I continue to view the stock as a compelling relative opportunity.

Commentary: Phillip-Morris is the third-leading producer of tobacco products. The company has an 11.4% global market share and owns flagship brands such as Marlboro. In addition, PM is also launching an effort into less-harmful, heated tobacco products. This push has been largely unaffected by COVID and is expected to compensate for the declining global sales of cigarettes and tobacco bans.

ISRG-1.69%  – Intuitive Surgical ( PLAY )

ASM Indicator: As discussed last month, the expected improvement in ISRG’s key indicator continues to be glacial, but it is making marginal favorable progress. Despite the painfully slow recovery, ISRG’s ASM and bars still point to an attractive reward/risk setup going forward and is still supporting my view to stick with this high quality medical equipment name.

Brian’s Take: No change here. I acknowledge that the performance of ISRG has been poor and is my biggest disappointed since the Dunk’s List was launched. Importantly, however, the fundamental story has not changed, and its indicators remain quite bullish. Although this name has really tried my patience, I am going to remain committed until its indicators flip to unfavorable.

Commentary: The Health Care sector is experiencing healthy disruptions and changes, and ISRG is one of the leading innovators in the space. The firm has products that utilize both robotics and augmented reality to positively impact the industry and get improved results for patients.

COST-0.24%  – Costco Wholesale ( PLAY )

ASM Indicator: Its key indicator remains favorable, and its bars have begun to grow again as I commented on last month. The set up for COST continues to look quite attractive for the next 12-18 months.

Brian’s Take: The stock has pulled back during since its August high, but strongly remains above its June while the S&P 500 has closed below it. The indicator backdrop for COST remains supportive of relative performance gains if we look forward 12-18 months. I reiterate my view tactical weakness should be viewed opportunistically to raise exposure.

Commentary: Costco Wholesale Corporation is a membership warehouse club and sells all kinds of food, automotive supplies, toys, hardware, sporting goods, jewelry, electronics, apparel, health, and beauty aids, as well as other goods. COST serves customers worldwide as they have over 800 membership warehouse stores, the company is the nation’s largest wholesale club operator. Primarily under the Costco Wholesale banner, it serves more than 111 million cardholders in some 45 US states, Washington, DC, and Puerto Rico, and about 10 other countries. The company carries an average of approximately 4,000 active stock keeping units (SKUs) per warehouse in its core warehouse business, significantly less than other broadline retailers (many in bulk packaging), ranging from alcoholic beverages and appliances to fresh food, pharmaceuticals, and tires. Certain club memberships also offer products and services, such as car and home insurance, real estate services, and travel packages. Costco generates most of its sales in the US.

AMT0.18%  – American Tower ( PLAY )

ASM Indicator: Its key indicator and green bars continue to be favorable, which is quite impressive with so many names seeing their respective forward profits outlooks lowered. So, I continue to view AMT as an attractive opportunity.

Brian’s Take: AMT has struggled as interest rate pressures have been increasing since the recent FOMC meeting. With that being said, it still has been an outperformer since inclusion, and it looks poised for outperformance once rates finally reach their peak and the market shifts its focus to slowing economic growth. This name still looks quite attractive and I will keep recommending buying dips in this name as the 12-18 month outlook looks favorable.

Commentary: American Tower (AMT0.18% ) is now the largest REIT in the S&P 500 and specializes in leasing multi-tenant properties for wireless providers. It has a real estate portfolio of over 200,000 communications properties. It is heavily exposed to fast growing 5G in domestic and foreign markets. It has steady dividends and has proven itself to be a quality compounder over time with secure revenue and above-average pricing.

Changes

PYPL0.24%  GM-0.16%  SBUX0.44%  TSM BKNG-0.45%  (HOLD)

PYPL, GM, and TSM, which are holdovers in the Hold bucket, will continue to stay there for now.

SBUX has shown some favorable signs and is being evaluated for reentry to the starting lineup of the Dunk’s List.

BKNG has shown deterioration and is being removed for the Hold bucket.

The “HOLD” bucket is one where a name is not completely kicked out. Longer-term investors with enough funds to keep holding these names and still able to buy our replacement picks may be well served to do so.