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

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

Market Commentary

The S&P 500 is finally nearing the end of what has been a challenging year, to say the least.  The unwanted re-emergence of our old nemesis, inflation, has certainly caused the headwinds for equity investors to strengthen considerably.  Regardless of whether one was a professional manager or an individual investor, 2022 was an incredibly difficult period in which to post absolute positive returns.  Investing is a never-ending process of implementing, evaluating the performance of what worked and what could be improved, and making the proper changes in an attempt to achieve better returns in the future.  The best investors all follow this process with strict discipline, constantly asking themselves what they learned over the past year and what they might have done differently.

Once the elevated inflation domino appeared during 1Q22, the spillover impacts were widespread.  As a direct result, the Fed has been thrust into a hard-fought battle for the first time in quite a while, and we were reminded again of the importance of following Rule #1 — Don’t Fight the Fed.  However, this time the central bank was no longer our powerful and helpful ally, but a formidable foe.  Undoubtedly, there has been some progress made, and it has become consensus that the worst year-over-year inflation readings are behind us.  With that being said, the path for forward inflation and Chair Powell and Gang’s final destination are topics of heated debate by external experts, as well as internally here at FS Insight.  

From my perspective, I have been and remain in the camp that the FOMC’s inflation fight is going to be hard-fought.  The slowing of the headline inflation readings thus far from over 9% to under 7% on a year-over-year basis was the relatively easy part.  Based on my research, the further decline will likely get incrementally harder as we get closer to 2%.  Hence, the bad news appears to be that time is needed to declare clear victory as inflation metrics move closer to target.  In addition, as certain parts of the data have cooled, the Fed has been clear in their communication that they are also looking at much more than inflation readings to raise their confidence that a definitive shift to a more dovish policy stance is appropriate.  Even if the central bank slows the pace of tightening and ultimately stops, will there be a return of monetary easing?  This will be an ongoing topic of debate throughout the investment community during 2023, but as of now, my work suggests the bar is set quite high to get to accommodation.  So, stay tuned here.  

Another negative impact of elevated inflation is that the outlook for corporate profits looks to be too high.  There are many reasons for this, including the following:

  1. Fed tightening is likely about to slow domestic economic growth.
  2. A weakening of the labor market will presumably hit consumer spending.
  3. Elevated input costs and labor-wage pressures create headwinds for corporate operating margins.
  4. A strongish USD also is a drag on forward profits, and
  5. It is probable that corporate share buybacks will be lower going forward. 

I have been discussing since the end of 1Q22 that my proprietary earnings revisions metric for the overall S&P 500, which I call ASM (Analyst Sentiment Measure), was falling and had not yet reached its maximum negative that would eventually be a bullish contrarian signal.  Importantly, because this metric has bottomed BEFORE all major bottoms since 1990, I am reluctant to flip back to a more bullish outlook until there is some evidence of it reaching a trough and positively inflecting.  Could things be different this time?  It is always possible, and I am on alert, but as of now, it has not been part of my base case. 

My research also suggests that valuation multiples for equities, which reached all-time highs early in 1Q22, still look too high.  Yes, they have fallen somewhat since their peaks, but a further downward adjustment looks to be in order if the Fed does end up going “higher for longer,” which is one of my longstanding concerns for the equity markets.  If this assumption appears to be incorrect and policy is headed towards “lower for shorter,” I will have to revisit this view.   

Reiterating Key Assumptions: 

  • Headline Inflation has peaked.
  • The U.S. economy is decelerating, not collapsing, and fears of slowing have not reached their maximum level.  The labor market remains resilient and is not yet showing any definitive signs of decelerating, let alone contracting.
  • Forward expectations for corporate profits are too high and most certainly will need to be lowered, especially for names that are more sensitive to cyclicality.
  • My work suggests that there has been neither a price nor fundamental capitulation yet, but they will both likely happen at some point in front of us.
  • THE equity market bottom is not in place yet, and my next downside target area is 3200-3000.  NOTE:  sharp downward capitulatory price action that takes the S&P 500 below 3500 may cause me to shift my view and start putting some money to work. 
  • My work continues to suggest selling rallies and not buying dips.  

Bottom line:  The immediate outlook still looks to be considerably risky, and it is critical for investors to remain vigilant. 

I will once again reiterate that the adjustment process for the economy, inflation, forward profits, and valuation levels continues to need more time and work to be done to reach readings that shift the risk-reward ratio back to reward for strategic investors.  Patience will be needed, but the payoff will be a great opportunity to get high-quality stocks at lower prices that will likely have a longer-duration move higher.

Consequently, my advice remains the same: Bounces should be viewed as bear market rallies that will likely fail, and they should be used to sell into, reposition, raise hedges, and to reload shorts.  Any tactical gains or outperformance for now is just the side show while the MAIN EVENT of pivoting for THE bottom is still in front of us.

Changes this month

There are no additions or removals this month.

Summary

Play: consider increasing exposure

DUNKS
SBUXStarbucks
FANGDiamonback Energy
CPBCampbell Soup
RTXRaytheon
MNSTMonster Beverage Corp.
MID-RANGE JUMPERS
PMPhillip Morris
TPXTempur Sealy Intl.
ISRGIntuitive Surgical
COSTCostco Wholesale
AMTAmerican Tower

Hold: consider keeping and not adding exposure

GMGeneral Motors Company
AMZNAmazon
CCJCameco Corp.

Analysis

Dunks

$SBUX – Starbucks

ASM Indicator: SBUX’s ASM indicator is now above the important zero level and is still rising. Importantly, it is not extreme and has plenty of room to move even higher. Additionally, its first bars are green and are slowly getting bigger. The combination of these factors strongly suggests that the company has a strong tailwind towards additional outperformance.

Brian’s Take: Since being returned to the starting lineup of the Dunks List, SBUX has provided solid relative performance gains during a challenging equity backdrop in December. The aggregation of its key indicators is presenting a compelling case that the company is likely to post solid outperformance during 1H23. I would view any tactical weakness as an opportunity to raise exposure. 


Commentary: SBUX is one of the most geographically diversified Consumer Discretionary stocks, and its deep penetration and considerable pricing power should boost its operating results as economies reopen and move towards normalization.

 MNST 0.14%  – Monster Beverage Corp. ( PLAY )

ASM Indicator: Its key indicator continues to push higher and is now in the northern hemisphere, a bullish reading above zero. Further supporting this favorable development is MNTS’s small red bars, which continue to shrink. A flip back to green during 1Q23 would raise my bullish conviction even further.  

Brian’s Take: The company has a supportive set of indicators, as well as positive technical set up based on my proprietary tools. The stock has added relative gains since its inclusion last month and my research points to additional outperformance during 1H23. 


Commentary: Monster Beverage Corp. is a holding company that engages in the development, marketing, sale, and distribution of energy drink beverages and concentrates. It operates through the following segments: Monster Energy Drinks, Strategic Brands, and Other.

 FANG 0.83%  – Diamondback Energy ( PLAY )

ASM Indicator: As stated in my last update, FANG’s key indicator appears to be beginning a new up cycle, and with crude at the low end of its 2022 price range could provide some additional tailwind as it moves higher in 1H23. Moreover, its small red bars look primed to flip back to green, which would further support outperformance during the first half of next year. 

Brian’s Take: Since Energy’s most recent relative sector performance peak in early November, most names within the space have been consolidating. With that process looking nearly complete based on my analysis, FANG’s supportive indicator backdrop portends solid relative gains for the next couple quarters. 


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

 RTX 0.12%  – Raytheon ( PLAY )

ASM Indicator: I commented last month that RTX’s ASM indicator was starting a new bottoming process and showing nascent signs of its next up cycle, and that is still the case now. Its bars also look poised to start shrinking as we head towards 1H23. 

Brian’s Take: The company continues to deliver solid relative performance and held up quite well during the weak December for the overall S&P 500. Its indicators suggest that the reward-risk set up for RTX is attractive for additional relative gains for 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.

 CPB 0.86%  – Campbell Soup ( PLAY )

ASM Indicator: CPB’s ASM remains in a strong uptrend and is not yet extreme. Also supporting this positive signal, the company’s green bars are now getting bigger, which historically bodes quite well for future outperformance.   

Brian’s Take: CPB has been a solid absolute performer, and a significant outperformer since it was added near midyear. Furthermore, investors have also been getting a 3% dividend when it was included, and despite its strong price gains still yields over 2.6%. Thus, the total return for CPB remains quite compelling based on its indicators as well as my ongoing unfavorable view on the overall equity outlook. I will probably stick with CPB during 1H23 and may look to take profits once I get a bullish set of signals for the overall market.   


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 1.05%  – Tempur Sealy International ( PLAY )

ASM Indicator:  TPX’s key metric is slowly beginning a new uptrend, but it is still quite early. Its red bars are showing more definitive improvements, as they have been getting smaller for nearly two quarters. The contrarian bullish readings suggest that the stock is ready for additional upside performance gains. 

Brian’s Take: The company’s strong price performance since being included in August has it atop the leaderboard of best performers. TPX may get to a full tactical overbought condition in the coming months, but any tactical weakness should be viewed 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.

 PM -0.66%  – Phillip Morris ( PLAY )

ASM Indicator: As stated last month, PM was still trying to fully stabilize from its ASM tactical hiccup that occurred during 3Q22, and it appears to have been successful. Its key indicator has once again positively inflected, and its red bars are getting smaller. Based on these readings, the forward outlook appears to be quite supportive of outperformance during 1H23.

Brian’s Take: Like CPB, the stock provides a countercyclical exposure with an attractive 5.02% dividend yield. The stock was outperforming even before adding in the income. The mix of supportive indicators and yield continue to flag PM as an attractive idea in a challenging overall equity market environment. 


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 -0.25%  – Intuitive Surgical ( PLAY )

ASM Indicator: Its key indicator is still strongly rising with bars that have flipped back to green. This historically leads to future outperformance for any name. 

Brian’s Take: ISRG was a poor performer after its inclusion in December 2021 until its final low in October 2022, but our patience has been rewarded as it has fought its way back to almost flat relative to the S&P 500. Its positive indicator set up strongly portends additional relative gains for ISRG during 1H23.


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 0.08%  – Costco Wholesale ( PLAY )

ASM Indicator: Its key indicator has weakened since my last update and a small red bar has appeared, which makes me put COST on a downgrade watch list for the coming months. 

Brian’s Take: The stock was holding up OK, but it struggled quite a bit during December as its indicators softened. With COST both oversold and sitting on a technical support area near $450, I am willing to give it a bit of time to see if its indicators can show signs of improving again. Unlike most of the other names on the list, I am not adding to COST on weakness at this time.


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.

 AMT 0.11%  – American Tower ( PLAY )

ASM Indicator: ASM continues to resume its uptrend that started during 1Q22. The red bars for AMT have also been getting smaller, which would be a bullish level relative to the previous down cycle. Early evidence suggests that the two important indicators are likely to show solid bullish improvement in the coming quarters.

Brian’s Take: The stock has not been one of my best picks thus far, but in a challenging environment and the inclusion of its nearly 3% dividend yield, AMT still looks attractive based on its key indicators. I am viewing the recent unimpressive relative performance as an opportunity to raise exposure. 


Commentary: American Tower ( AMT 0.11% ) 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.

Holds

 CCJ 0.82%   GM 1.70%   AMZN 0.19%  (HOLD)

AMZN, CCJ and GM, which are holdovers in the Hold bucket, will continue to stay there for now. (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.) 

Disclosures (show)

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