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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Also, Brian has created a short methodology video explaining his sector selection methodology. Click here to watch it!
Market Commentary
The S&P 500 continues to hold above 3900 as there has been a lot of mixed data and a plethora of Fed speakers. While the index holds this level, the door is open for a run to higher technical resistance areas. The next several weeks will be quite important as there will be a slew of data being released in front of the December FOMC meeting, which will be quite critical for 1Q23. Also, be on your toes for Chair Powell’s recently scheduled 11/30 speech, which might provide some important foreshadowing of the last policy meeting of the year.
The bulls have spun quite an interesting set of assumptions that fuels the S&P 500 higher into year-end and into 1Q23.
- High cash levels by institutional funds, positive seasonals, equity positioning that is on the lighter side create enough tailwind to power the S&P 500 to significantly higher levels.
- The inflation battle has been won and Chair Powell and Crew are about to announce a pause in their tightening cycle.
- Forward earnings cuts don’t matter as they are already discounted.
- Or better yet, that we will have a Goldilocks scenario where interest rates are falling, the economy avoids a major recessionary slowdown, profits surprise to the upside, and valuation multiples have nowhere to go but higher.
I continued to reiterate that my work still does not support such an optimistic outlook, or the assumptions likely needed to suggest that downside risk and lower equity prices are off the board. Admittedly, the fact that the November inflation data was softer than I was expecting does keep me on alert for the upcoming December CPI/PPI releases.
Earnings outlooks still look too high/negative earnings revisions. My main indicator for the S&P 500 for estimate revisions is called ASM (Analyst Sentiment Measure) and it is still falling as I have been discussing since early April. Importantly, it does not yet appear to have made its final extreme low, which in my view is an extremely critical occurrence to switch back to being strategically bullish. I will repeat yet again that this process is likely to persist for at least another 1-4 months, at minimum. Thus, patience will be needed if the historical relationship between the ASM indicator reaching max pessimism is consistent with previous six major bottoms since 1990. REMINDER — Why is fundamental capitulation important? My research shows that since 1990 the ASM indicator has made its extreme low BEFORE the S&P 500 makes its FINAL bottom in all six periods.
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 names that are more sensitive to cyclicality.
- My work suggests that there has neither been 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 still suggests selling rallies and not buying dips.
Bottom line: The current rally could very well have some more work to do as bearish sentiment, high cash levels, positive seasonals and tactical technicals, corporate share buybacks, and CTA buying could help fuel the S&P 500 higher. Importantly, however, my analysis does not support the conclusion that the bear is over, and we have begun a new sustainable bull market. Hence, despite the attempts to bounce from time to time, my key indicators are still signaling that downside risk clearly outweighs upside potential and investors still need to be cautious.
I will once again repeat that the adjustment process for the economy, inflation, forward profits, and valuation levels still needs 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.
Changes this month
Additions
| Ticker | Type | New Status |
|---|---|---|
| SBUX | Dunks | PLAY |
| MNST | Dunks | PLAY |
Removal
| Ticker | Current Status | New Status |
|---|---|---|
| AMZN | PLAY | HOLD |
| CCJ | PLAY | HOLD |
Summary
Play: consider increasing exposure
| DUNKS | ||
| SBUX | Starbucks | |
| FANG | Diamonback Energy | |
| CPB | Campbell Soup | |
| RTX | Raytheon | |
| MNST | Monster Beverage Corp. | |
| MID-RANGE JUMPERS | ||
| PM | Phillip Morris | |
| TPX | Tempur Sealy Intl. | |
| ISRG | Intuitive Surgical | |
| COST | Costco Wholesale | |
| AMT | American Tower |
Hold: consider keeping and not adding exposure
| GM | General Motors Company | |
| AMZN | Amazon | |
| CCJ | Cameco Corp. |
Out: consider removing exposure
| CME | CME Group | |
| LYV | Live Nation | |
| BKNG | Booking Holdings | |
| TSM | Taiwan Semiconductor | |
| PYPL | PayPal |
Analysis
Dunks
$SBUX- Starbucks (Upgraded from HOLD bucket)
ASM Indicator: As I originally forecasted, it did indeed bottom, but it did take longer than expected. With SBUX’s ASM indicator now clearly rising and its first green bar for this cycle, its key metrics are strongly suggesting that the company has a strong tailwind toward future outperformance.
Brian’s Take: After being put on the bench and moved to the HOLD bucket during 1Q22, SBUX took more time and finally began showing bullish second derivative improvements during 3Q22. Well, those favorable developments are too compelling to overlook, and I am moving SBUX back to the starting five Dunks List. The stock is tactically overbought and may need a period to consolidate, but any tactical weakness should be used 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 begin to reopen and move towards normalization during 2022.
MNST -0.25% -Monster Beverage Corp. ( PLAY )
ASM Indicator: Its key indicator has made a major extreme low and has positively inflected, which is contrarian bullish signal. In addition, its red bars are also getting smaller. Historically, appears to be attempting another positive inflection along with a green bar.
Brian’s Take: With my indicators still unfavorable for the overall market and cyclicality, MNST provides a nice balance of growth and some defensiveness, which along with its strong indicator backdrop provides a good relative opportunity. The company will also be the beneficiary when the USD begins to weaken during 1H23 as my research suggests. The stock has also been acting quite well technically and appears that it is going to try and breakout. I want to take a shot as there are few names that check as many boxes as MNST.
Commentary: Monster Beverage Corp. is a holding company, which 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 0.13% – Diamondback Energy ( PLAY )
ASM Indicator: FANG’s key indicator appears to be starting 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. Its red bars also look poised to flip back to green, which would be another bullish occurrence.
Brian’s Take: Most energy names have had sharp pullback over the past week as crude has been weak during November because of China moving back towards lockdown and rumored OPEC+ supply increases. FANG appeared to be breaking out but was overbought at the same time. The pullback over the week appears to be a buying opportunity.
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.
RTX -1.77% – Raytheon ( PLAY )
ASM Indicator: It is starting a new bottoming process and is showing nascent signs of its next up cycle along with bars that will likely confirm in the coming months. The outlook for 1H23 appears supportive of this view.
Brian’s Take: The stock continues to be an outperformer since it was added to the Dunks List, and its indicators suggest 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 2.79% – Campbell Soup ( PLAY )
ASM Indicator: This historically non-cyclical stable earnings company continues to see its ASM indicator in an uptrend, which is keeping my investment view constructive, especially with my overall equity market view still unfavorable.
Brian’s Take: The stock has had a volatile November with CPB trying to breakout, falling back to its 200-day moving average, and then returning back to recent highs. Despite this up and down, my research still shows the stock serving its purpose by providing stable relative performance gains with a nearly 3% dividend yield. My work continues to flag CPB as an excellent reward/risk option while the Fed is still 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
TPX – Tempur Sealy International ( PLAY )
ASM Indicator: I will reiterate my comments from last month for TPX as 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 company has been one of the Mid-Range List top performers since it was added a few months back. Its indicators suggest that there is potential for this name to deliver additional performance gains. It should be noted that the stock is tactically overbought so investors should be more discerning with entry until it has consolidated some of its recent gains. Importantly, 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 -0.26% – Phillip Morris ( PLAY )
ASM Indicator: PM is still trying to fully stabilize from its ASM tactical hiccup that occurred during 3Q22. It has been taking a bit longer than I have been expecting, but it is slowly making progress. The setup and forward outlook appear to be supportive of ASM improvement during 1H23.
Brian’s Take: Like CPB, the stock is providing a countercyclical exposure with an attractive 5.25% 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 a 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 1.70% – Intuitive Surgical ( PLAY )
ASM Indicator: Its key indicator continues to show a healthy and supportive rising trend with bars that have flipped back to green. This historically leads to future outperformance for any name.
Brian’s Take: After bottoming in June and successfully retesting its lows in October, ISRG looks to be an attractive mix of positive indicators and a good technical set up that is likely to lead to outperformance 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 0.88% – Costco Wholesale ( PLAY )
ASM Indicator: Its key indicator remains stalled near the always important zero line, but the aggressive tactical data suggests that the next move is likely to resume its ASM uptrend. Its bars are in a similar position, and I continue to view this favorably.
Brian’s Take: The stock has been a market performer since it was added and has suggested the relative weakness into the October low as an opportunity to raise exposure. COST’s indicators are signaling that the stock is poised to during 1H23.
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 0.25% – American Tower ( PLAY )
ASM Indicator: Its ASM has once again bottomed and is beginning its next up cycle. With a shrinking small red bar cycle, the forward estimate data suggests that AMT should have the wind at its back during 1H23.
Brian’s Take: After an unexpectedly weak August to mid-October period, AMT’s stock price has been grinding its way higher as its indicators have once again flipped to fully favorable. Its nearly 3.20% yield also makes this an attractive name in this continued challenging equity market.
Commentary: American Tower (AMT 0.25% ) 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
BKNG 3.93% CCJ -3.10% GM 3.37% AMZN 1.73% TSM -0.90% (HOLD)
AMZN is being moved to the Hold bucket as its ASM indicator has weakly rolled over and can no longer be considered for the starting lineup. I will keep an eye on it and look to move it back up if its indicator backdrop improves.
CCJ is being moved to the Hold bucket as I am not as excited about the tactical outlook following its acquisition of Westinghouse, and it not being a pure play for uranium anymore. The longer-term outlook still looks quite interesting but is lacking catalysts for the next couple of quarters.
GM, which is holdover in the Hold bucket, will continue to stay there for now.
As unsatisfying as it is to sell a stock after a decline, I am compelled to remove PYPL as its key indicators have once again rolled over. My work suggests that there is a lot of bad news in the name, but further tactical weakness is too much to keep holding. I will revisit PYPL again during 1H23.
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.
