Our research, which has been developed over more than two decades on Wall Street, 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 raise the probability, you can potentially outperform 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 of these stock lists are derived through 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
Macro Commentary
I’ve been discussing my evolving view on US equities over the past few months. As readers should know by now, I flipped from my longstanding bullish view based on the many risks now being processed by markets. My constructive thesis was anchored on an accommodative Federal Reserve and positive momentum in earnings estimate revisions.
Both important support legs have been removed from the stool, so to speak. In addition, I have also recently spoken about 4,000 for the S&P 500 being a proverbial “line in the sand” for markets. Well, last week, that level was breached, and this is one item on a list of mounting reasons why I see additional downside ahead. The same risks I’ve been mentioning in my recent Wall Street Whispers and my previous monthly installment of Brian’s Dunks are still very much in play.
- Russia/Ukraine conflict—no end in sight
- Elevated energy prices and their negative impacts on both inflation and consumer demand
- Rising interest rates
- A hawkish and action-oriented Fed
- Growth slowdown fears increasing, leading to a 1-3 month duration of estimate revisions cuts for all things cyclical
So, my work has clearly had a shift towards unfavorable, and is signaling that there is unfinished business that will likely occur to the downside. Thus, my work is not flashing that a “shocking” rally attempt is a high probability outcome. With that being said, equity markets rarely go up or down in a straight line, and there will almost assuredly be some rally attempts along the way to the ultimate bottom. As tempting as a bounce may be to jump on board, my research is suggesting it would likely fail and should be used to sell into, increase hedges, or short once there are signs it would be ending. There will be a point in the future when my key indicators indicate that weakness should be bought for equities as they are making a durable and longer duration trough.
The current environment is tricky for any investor. My Dunks product is designed to outperform the S&P 500, especially when the index is in an uptrend based on my proprietary Earnings Revision Model (ERM) and supportive ASM readings, which is my proprietary earnings revision indicator. However, down markets are challenging for any long-only positioning.
I am clearly not happy with the absolute performance of Dunks since we launched but under the circumstances, there are some glimmers of hope as the breadth of the picks have outperformed, while there have unfortunately been some outsized disappointments. Importantly, I do want to stress that my model historically performs very well on a 6, 12, and 18-month time horizon, and my research strongly supports that the Dunks will be validated once we move past this period of elevated volatility and macro challenges.
There is unfortunately no magic bullet that will fully insulate investors with money in equities from the wily markets we now find ourselves in. However, I have been on Wall Street for a long time, and have both the battle scars, and firsthand experience that my models have proven invaluable over the decades, particularly during times of duress and the pivot back to bullishness. My work shows that slow, steady, and keeping with a process adds value and outperforms on longer time horizons. Given the volatility of markets right now, I think it is even more important to stick to a disciplined methodology and there’s nothing more critical for the future value of a stock than its earnings prospects.
Stay both cautious and alert for opportunities. Watch your risk exposures, and let’s be ready to spring into action. We can all survive the bumpy ride and prosper in the longer term. Hang in there.
Active Play List
Dunks
RTX 0.60% – Raytheon Technologies (PLAY)
ASM Indicator: Its ASM cycle continues to show strong signs of rising with red bars that appear poised to flip to green, which would be a positive confirming occurrence for future price performance gains.
Brian’s Take: The stock has been struggling a bit despite a healthy and supportive indicator backdrop. RTX had reached overbought and may only be consolidating gains. With the tactical overbought reading worked off, the weight of evidence suggests that RTX should be an outperformer if we look out 6-9 months.
Company 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 1.67% – Cameco Corp (PLAY)
ASM Indicator: There has been very little that has changed for CCJ as its ASM indicator is rising and its green bars are strong. The macro and fundamental backdrop that has been favorable remains in place.
Brian’s Take: I will reiterate my comments from last month that the longer-term investment case for CCJ remains in place and, notwithstanding tactical pullbacks along the way, that the stock will reward investors for the next 6-12 months as nuclear power will likely be a growing part of Western energy inputs over the next decade. My work suggests that investors should opportunistically raise exposure on tactical dips.
Company 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.
FANG 1.56% – Diamondback Energy Inc. (PLAY)
ASM Indicator: Its key metric is getting to an elevated level that will keep me on alert to potential topping, which is a contrarian trim/sell signal. If this occurs in the coming months, I will likely remove FANG. For now, it’s still rising and has been accompanied with strong green bars, which keeps me in the stock.
Brian’s Take: On an absolute basis, the stock continues to grind in a sideways fashion. However, when comparing it to the S&P 500, it has been a decent outperformer during this challenging period for the overall market. Thus, it has been helping our relative performance and I am sticking with FANG.
Company 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.
LYV 1.15% – Live Nation (PLAY)
ASM Indicator: In my last comment, I stated LYV’s key earnings revision indicator appears to have completed its shallow “down-up” cycle and looks poised to resume its uptrend. Well, that clearly has continued, and its key indicator is still supportive.
Brian’s Take: The stock has struggled as macro concerns over the consumer’s health are becoming louder. From my research, LYV is not showing signs of deterioration and the recent weakness is unwarranted. I am going to stay with LYV but will be monitoring it if things start to deteriorate.
Company Commentary: This company’s superior scale and operating expertise allow LYV to benefit from the ongoing normalization and return of live events, including concerts.
AMZN -0.22% – Amazon (PLAY)
ASM Indicator: Since it’s been in the Dunks, AMZN’s key metric was at or near negative extremes, which in my methodology provides a bullish contrarian signal. What it shows when the ASM is in the “lower right-hand corner” is that recent earnings revisions have been quite bad. You may ask, “why would you like to buy something like this?” My research shows that when earnings revisions get so bad, they can only get better, and the bad news is likely priced into the stock. The forward outlook strongly suggests that the sentiment for AMZN cannot get much worse, which makes this quite attractive in my work.
Brian’s Take: The price performance has been beyond awful since I included it on the Dunks. I am not happy with that at all, but unfortunately it does happen as my system and my brain are not infallible. With that being said, performance like this should be the exception and not the norm. At current price levels, AMZN not only looks good per my ASM indicator, but also on a valuation basis. The stock is also quite oversold. Combining all these factors, the 6-12 month outlook looks quite attractive, and I am going to stick with AMZN.
Company Commentary: AMZN is the undisputed leader in e-commerce and cloud services through its Amazon Web Services segment. We believe this 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.
Mid-Range Jumpers
PM -0.58% – Phillip Morris (PLAY)
ASM Indicator: Its ASM indicator continues to show healthy signs that it is working off a negative extreme, which is a bullish contrarian signal. I will now be looking for its red bars to shrink to fully confirm its ASM uptick and fuel additional relative performance gains.
Brian’s Take: The stock has been a nice outperformer during these challenging markets and a nice addition to a portfolio that is more offensive. The improving ASM readings, dividend yield of nearly 5%, and interesting growth outlook are keeping PM attractive, based on my work.
Company 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 for tobacco bans.
AMT 0.82% – American Tower (PLAY)
ASM Indicator: Its key indicator is still drifting up after having made an extreme bottom during 1Q22. Furthermore, its red bars reached a negative extreme and are trying to start shrinking, which would fully confirm its favorable ASM reading and my bullish view.
Brian’s Take: The stock has slightly outperformed since it was included last month and is holding its own in a challenging environment. As the market will likely shift to growth fears that lower long interest rates, AMT is poised to be a considerable outperformer over the next 3-6 months, at minimum. Its nearly 2.5% yield also makes this name attractive based on my research.
Company Commentary: American Tower (AMT 0.82% ) is the second 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
ISRG -0.80% – Intuitive Surgical (PLAY)
ASM Indicator: My comments from last month are still on track—the fundamental backdrop for ISRG remains healthy and is getting past the challenging period that was caused by the last COVID wave during 4Q21. One can see this in ISRG’s improving ASM. The setup is in place for relative performance gains for the next 6-12 months.
Brian’s Take: Like AMZN, the stock performance of ISRG has been terrible. Besides being a higher multiple stock, this kind of outperformance is not only extreme but also quite anomalous. The company continues to execute well, has strong products, and both its fundamental and earnings revision outlook are quite attractive. On a 6-12 month basis, we still remain confident that ISRG will end up rewarding patient investors.
Company 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.
CME 1.40% – Chicago Mercantile Exchange (PLAY)
ASM Indicator: The indicator backdrop for CME, when looking at its ASM and green bars, has played out as expected and is still strengthening. Importantly, the readings are neither extreme nor showing any signs of deterioration.
Brian’s Take: The stock has not acted in line with its ASM metric, which can happen, but it is not the norm. CME was a bit overbought and its P/E multiple was above average, so a consolidation/small pullback would not have been surprising. Yet, the size of its decline appears unwarranted and overdone on a few metrics I track. My analysis suggests this is an opportunity to raise exposure as the stock is quite attractive for future gains.
Company Commentary: This company is a cutting-edge financial services name that is a leader in the burgeoning area of derivatives. CME’s profitability will likely continue to increase as more investors use the firm’s comprehensive product offerings to manage risk.
BKNG 0.11% – Booking.com (PLAY)
ASM Indicator: BKNG’s key indicator continues to drift higher after making an extreme bottom late in 1Q22. With expectations quite low, the reward risk ratio for this name looks quite attractive based on my work.
Brian’s Take: The market has begun to worry a bit about companies that are driven by the health of the U.S. consumer. Granted, there are growing headwinds, but the expectations for BKNG are so low there is a lot of bad news priced in. From my contrarian perspective, the name looks quite attractive on a 6-12 month basis.
Company Commentary: BKNG operates as an online travel company that allows users to make travel reservations with providers of travel services, as well as provides accommodations, reservations, rentals cars, airline tickets, and vacation packages. BKNG operates six of the world’s leading online travel tools, and Booking.com, its namesake and top brand, offers online reservation services for nearly 2.4 million properties across over 220-plus countries.
