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.

Click HERE to read the intro of Brian’s Dunks



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

Despite the U.S. equity market trying to bounce from oversold conditions driven by hopes of a shift by Chairman Powell and Gang, my work is still quite unfavorable and continues to signal that there remains considerable downside risk once again for investors.  Without trying to oversimplify the backdrop, the two main factors that originally turned me bearish March/April, which were 1) a negatively sloped ASM indicator for the S&P 500 that has not reached max pessimism, and 2) a Fed that still has plenty of work to do, are still in place and that continues to temper any optimistic thoughts for the equity market.  

In fact, as time has passed my concern level has actually been rising even though the S&P 500 was down over 25% at the recent October low because not only do forward profit expectations still need to be lowered, but also that my work suggests that the Fed may have to MORE to do than what is currently priced in rather than stopping sooner (this view is out of consensus both versus the Street and with my colleagues). 

Moreover, it should be noted that my aggressive tactical indicators that I have written about in prior publications (HALO-2 & V-Squared) are mixed and are not flashing clear contrarian favorable signs for a tactical rally, which is different than the lows that occurred in March and June.  So, for aggressive tactical investors, I could make a small case for being less short to neutralish on a short-term basis, but there are virtually zero strategic signals showing up anywhere from my key indicators.

Over the last couple of months, I have commented that I get asked quite a bit in my regular institutional client meetings about what is priced into markets and about bearish sentiment/positioning data points.  Without a doubt, these are my biggest concerns to holding onto the clear bearish conclusion from my key indicators.  Being a contrarian, I am totally empathetic to these points, but based on my research they are only part of the story and if not accompanied by other key factors only lead to countertrend bear market rallies that ultimately fail and fall to new lows.  

So, at the risk of holding onto my unfavorable view for too long and missing the beginning of a new powerful up move, I am still advising investors not to chase rallies and remain vigilant about their equity exposures, be patient, and stay alert for our expected bullish pivot that is still in front of us. 

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.  After lagging the benchmark S&P 500 for most of 2022, the Dunks has been flirting with outperforming over the last couple of weeks.  The Mid-Range Jumpers have weakened a bit and lost a bit of relative performance.  So, there is hardly any support to celebrate or declare victory, but the list is in good shape to post improving results once we get back to calmer seas.  I remain certain that my goal will be reached over time, and I do want to reiterate that my model historically performs well on a 6-, 12-, and 18-month time horizons so let’s stick with the process and we will likely be rewarded for our discipline. 

Looking forward, my analytical tools still suggests that there will be an attractive opportunity to aggressively shift towards bullishness, but more time is likely needed.  Thus, it is my advice that investors should remain conservatively positioned and be ready to put money to work once my indicators finally 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 suggesting, 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: My main bearish conclusions have not changed at all as my key indicators remain unfavorable, which historically has led to weak equity market returns.  As stated previously, there will be tactical countertrend bounces along the way that aggressive accounts can try to play, but for the most part they should be used to either sell into, reposition, or raise hedges.  Consequently, 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 sell offs opportunistically to raise exposure to great ideas at attractive price levels. 

Changes this month

Summary

Analysis

Dunks

AMZN1.30%  – Amazon ( PLAY )

ASM Indicator: After making two extreme lows during 1H22, AMZN’s key indicator has been rising and is nearing the always important zero line, which is when earnings revisions flip from less bad to good.  While this ASM ascent has been occurring, the company’s red bars have been shrinking and is an important confirmatory piece of data.  As we have stated nearly all year, the news is getting less bad for AMZN, and this has historically led to outperformance in the subsequent quarters.  As a result, the thesis for the stock remains in place. 

Brian’s Take: As interest rate pressures remain, nearly all high-multiple growth companies have formidable headwinds, and AMZN is in this bucket.  So, on the one hand, the company’s P/E valuation multiple is a negative while its earnings outlook is a positive.  The headwind of higher interest rates for AMZN, as well as other Dunk companies, may continue, but it is late in the game.  I am willing to hold AMZN as its forward return risk ratio is quite favorable, which will likely reward patient longer-term investors.  

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.

FANG0.88%  – Diamondback Energy ( PLAY )

ASM Indicator: In my last couple of updates, I had put FANG on my radar screen to remove from the Dunks list as its ASM indicator had stalled, but recent data suggests that a new upcycle is beginning.  Because of this resumption, I am removing the full alert and once again see the company as favorable. 

Brian’s Take: The entire Energy sector has been in a sideways consolidation since June, and now seems to ready to outperform.  Not surprisingly, FANG has the same relative price outlook and with its ASM indicator about to provide valuable tailwinds the stock appears poised to provide attractive relative returns to investors. 

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.

RTX0.04%  – Raytheon ( PLAY )

ASM Indicator: The unexpected tumble that occurred has clearly ended and its ASM is once again rising, which provides an important underpinning for RTX’s attractive relative outlook.  Furthermore, the company is likely to be a beneficiary of the ongoing global conflicts that seem will be lingering for the foreseeable future and likely keep defense related orders quite healthy.    

Brian’s Take: The stock has been an outperformer since it was added to the Dunks List, and despite some choppy price action over the past four months, looks poised to provide strategic investors with attractive relative returns over the next 12-18 months.    

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.

CCJ2.96%  – Cameco Corporation ( PLAY )

ASM Indicator: Its key indicator appears to be attempting another positive inflection along with a green bar.  As I have stated since CCJ was added to the Dunks list, the company’s forward outlook is expected to ramp quite sharply and should provide strong tailwinds for its ASM.  Thus, my 12–18-month favorable view is still in place. 

Brian’s Take: The stock has been consolidating its 200% gain off its 1Q20 low and looks poised for additional gains as its ASM looks ready to begin a new up cycle.  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.  Consequently, I view CCJ as a core holding for a longer-term investor and suggest using tactical weakness as opportunities to raise exposure.  

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.

CPB-0.35%  – Campbell Soup ( PLAY )

ASM Indicator: With my overall equity market view still unfavorable, the historically non-cyclical stable earnings company continues to see its ASM indicator in an uptrend, which is keeping my investment view constructive.  

Brian’s Take: The stock continues to serve its purpose by providing stable relative performance gains with CPB’s nearly 3% dividend yield.  I reiterate that my work flags the company as an excellent reward/risk option while the Fed is stilling fighting inflation and equity volatility remains elevated.  There will be a point in the future when my outlook pivots back to bullish and CPB will be a source of funds, but there is still time before that occurs.   

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

TPX2.38%  – Tempur Sealy International ( PLAY )

New Addition

ASM Indicator: Its key metric has continued to rise from the negative extreme low that was reached during 2Q22.  The current operating environment is still challenging, but its ASM shows things are getting “less bad”, which is a classic contrarian signal based on my research. 

Brian’s Take: The most recent addition to the Dunks List has outperformed in a tough equity market environment as it has held its own since inclusion. Our entry point occurred following an over 50% decline in TPX’s stock price on falling ASM readings.  The 12-18 outlook looks quite attractive and would recommend using tactical weakness in the stock as an opportunity to raise exposure.  

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.

PM3.77%  – Phillip Morris ( PLAY )

ASM Indicator:  PM’s key metric had a tactical hiccup that led to what appears to be a one-time decline as its recent earnings release confirms.  In addition, the company has been pointing to favorable developments around its evolving growth strategy.   

Brian’s Take: Like CPB, the stock is providing a countercyclical exposure with an attractive 5.83% dividend yield.  Notwithstanding any tactical price volatility, PM continues to flag as relatively attractive within my ongoing negative view on the overall U.S equity market. 

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.

ISRG2.21%  – Intuitive Surgical ( PLAY )

ASM Indicator: After trying my patience for the last couple of months, ISRG’s key indicator has finally shown definitive evidence of positively inflecting.   The backdrop for the high-quality medical equipment company looks quite favorable and appears ready to resume its outperformance, which should be earnings driven.  

Brian’s Take: The impact of challenging tactical earnings is likely behind ISRG and only must deal with any ongoing interest rate pressure that may compress its P/E multiple. Importantly, however, I will view any tactical weakness going forward as an attractive opportunity to raise exposure as the company’s 12–18-month outlook looks quite favorable.     

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.

COST1.01%  – Costco Wholesale ( PLAY )

ASM Indicator: Its key indicator had a small, unexpected downside adjustment that appears to be losing steam.  I am willing to give COST the benefit of the doubt as its bars have not confirmed and the set up for company continues to look attractive for the next 12-18 months. 

Brian’s Take: The stock struggled subsequent to its August high when it was overbought, which has been worked off.  Now, COST looks likely to stabilize, and once its ASM kicks back in is poised to provide attractive relative performance gains if we look forward 12-18 months.  I reiterate my view that 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.

AMT1.09%  – American Tower ( PLAY )

ASM Indicator: Like several other names on the Dunks list, AMT had an unexpected rollover in its key indicator, which appears to be a one-time event and I will keep my eyes on this name for further weakness.   With that being said, the company is expanding overseas through acquisitions to sustain growth as the domestic market matures, which will likely lead to steadier trends beginning next year.

Brian’s Take: AMT’s stock price has been unexpectedly hit with some short-term concerns regarding churn, but the forward outlook appears to be quite constructive.  Thus, I am willing to see through tactical issues and view any pullbacks as an opportunity to raise exposure for an investor with a 12-18 horizon.  Its nearly 3.20% yield also makes this decision easier. 

Commentary: American Tower (AMT1.09% ) 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

PYPL2.28%  GM4.28%  SBUX-0.35%  BKNG2.05%  (HOLD)

PYPL, GM, and SBUX, 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.

TSM 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.