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
As we are past the busiest part of the 1Q23 earnings reporting season, the big takeaways from my perspective are: 1) Corporate profits are not collapsing; 2) However, they are weak and slowly getting worse; 3) Secular growth areas reports were less bad as my revisions work has been signaling. Looking forward, I believe earnings expectations still look too high and will need to be lowered as the U.S. economy is only beginning to show more clear signs of decelerating, and the weakest growth is likely still in front of us.
Chair Powell and Gang are on the calendar this week for their next FOMC meeting, and the consensus seems to be that they will raise another 25bps and announce the long-awaited pause. There will be likely a lot of debate about whether this is bullish or bearish, and if this will ultimately be the last hike. I continue to be in the higher for longer camp, and that for me means the following — 1) no imminent easing; 2) at least a 50% probability that this will not be the last hike. My work continues to signal that the inflation fight will be a long drawn-out battle, and the resiliency of the labor market is a large part of the reason why.
There are other potential landmines that we need to be aware of, which include: a) The resolution of the upcoming debt ceiling debate which will likely resurface during the back half of June/first half of July; b) the ongoing issues in the banking system; and c) expected weakness in the Commercial Real Estate sector.
My work continues to suggest that the reward/risk for the S&P 500 near 4200 is unfavorable, especially when the underlying strength outside of the top ten market cap weighted names has been considerably weaker than the overall index. Thus, I continue to advise caution and watching excessive equity exposure, while also using the recent strength to trim positions and raise hedges with volatility low and put protection cheap.
For money that is in the equity market, I continue to recommend a barbell approach with a combination of defensive areas and select offensive secular growth, and underweighting in cyclicality. Furthermore, my key metrics are also more favorable on Higher Quality and Larger Cap and avoiding Lower Quality and Smid. Lastly, I continue to see a slow increase in the number of single stocks that look interesting.
Below are my updated macro/market thoughts:
- Labor market strength may be waning somewhat, but signs of outright weakness and broad-based job losses are still not flashing, which keeps the Fed’s inflation fight challenging.
- Core inflation readings are not falling at the same pace as before and have caused some uncertainty about its path in the coming quarters, which lowers the probability of the market’s dovish Fed expectations.
- I remain in the Fed is higher for longer camp and my forecast for the terminal rate is still 5.25-6.25%. I am keeping this under review for another lowering in the coming months if the fears of a credit crunch accelerate.
- NO EASING — Despite the recent problems in the banking industry, my view remains that once the Fed does pause it will likely keep policy unchanged for an extended period. I expect Chair Powell to reiterate this at the upcoming May FOMC meeting.
- The economy looks headed towards a shallow recession, and then an extended period of sluggish growth.
- Corporate profit expectations arguably remain too high and need to be lowered as there are strong headwinds.
- Importantly, the immediate upside potential for the S&P 500 still appears limited, at best, while considerable downside risk remains for equity investors.
- From a positioning standpoint, economically sensitive areas/names are looking the riskiest based on my key indicators while secular growth ideas look relatively favorable.
- Single-stock opportunities are sparse, but they are slowly increasing. The general theme is higher vs lower quality and larger vs smaller cap.
Bottom line: My work continues to signal danger.
I maintain my negative view on the equity market and urge caution to investors. Based on my research, there is still a significant amount of risk for equity investors, and it is advisable to remain vigilant and patient. I continue to recommend using tactical countertrend rallies as an opportunity to raise cash, reposition, increase hedges, and increase short positions, given the uncertain and volatile market conditions.
For investors who must be fully invested or focus on relative performance, my analysis indicates that a barbell strategy of cash, defensive positions, and select secular growth names will outperform. My earnings revision work suggests that cyclical areas are likely to face significant downward estimate cuts, as I have previously forecasted. Therefore, investors should focus on idiosyncratic and high-quality single stock names with cyclical exposure.
Analysis
Dunks
SBUX -0.48% – Starbucks Corp. ( PLAY )
ASM Indicator: The key indicator is still favorably rising and has plenty of room to run before reaching a positive extreme. The bars for SBUX are making a bullish series of smaller red bars and flipping back to green. This combination historically bodes well for stocks in the subsequent quarters.
Brian’s Take: The stock continues to outperform since making its relative low during 2Q22, but it’s getting tactically extended. The odds are rising that SBUX may hit a slow patch to consolidate its gains. Any tactical weakness will be viewed as an opportunity to raise exposure unless it is directly related to an idiosyncratic development.
Commentary: SBUX is one of the most geographically diversified Consumer Discretionary stocks, and its deep penetration and considerable pricing power arguably should boost its operating results as economies begin to reopen and move towards normalization during 2023.
MNST -1.78% – Monster Beverage Corp. ( PLAY )
ASM Indicator: Since the last update, the key indicator for MNST has ticked back and resumed its ongoing uptrend while its bars flipped to a small red, keeping its shrinking pattern intact. Hence, the core setup for outperformance in the coming quarters still looks favorable.
Brian’s Take: Similar to SBUX, the stock continues to outpace the overall market since its last relative low in 8/22, and is starting to get tactically overbought. Thus, MNST looks in need of a breather in its unfinished uptrend, which I advise using as an opportunity to raise exposure.
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 0.58% – Diamondback Energy ( PLAY )
ASM Indicator: FANG’s key indicator has finally had a small positive inflection, which I have been looking for over the past several months and is historically a favorable signal for forward performance gains. Its red bars have also shrunk a small amount. Granted, these signals are minute and early, but the outlook for FANG appears to be improving as I have been expecting.
Brian’s Take: The sector as a whole has been struggling since early November, which has also affected FANG. My analysis suggests that there may be some additional underperformance in the near-term, but it is getting late. Overall, taking into account both the sector outlook and FANG’s indicators, it is advisable to stay the course as the company is likely to perform well in the next 6-12 months.
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.
CPB 0.57% – Campbell Soup ( PLAY )
ASM Indicator: After showing a shallow dip last month, CPB’s key metric appears to be making a bullish higher low. At the same time, its bars continue to make a series of shrinking red and growing green readings. The combination of both metrics continues to suggest that I keep CPB on the list.
Brian’s Take: The stock continues to grind higher and remains above its relative uptrend line that started at its 4Q21 low. In light of my ongoing cautious overall equity market view, CPB remains a solid member of the Dunks list, providing stability, defensiveness, and some dividend yield.
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.
RTX 0.86% – Raytheon ( PLAY )
ASM Indicator: Its key indicator is still healthily rising, and has finally gotten into the northern hemisphere, which historically has been a bullish signal. Also supporting this ongoing favorable reading, the red bars for RTX have disappeared and look poised to flip to green in the coming quarters, suggesting that relative gains are likely going forward.
Brian’s Take: The stock has been consolidating its overbought condition that occurred at its early January relative high. Its tactical indicators are signaling that another attempt to outperform is about to resume.
Commentary: Raytheon operates as an aircraft manufacturing company as well as a leading defense contractor. Thus, RTX has a diversified mix of commercial aerospace and military exposure and has been increasing its global exposure as well.
Mid-Range Jumpers
ADBE 1.37% – Adobe ( PLAY )
ASM Indicator: The key indicator for ADBE continues to rise and is not yet extreme, which suggests there is more to come. Its bars also remain green and look poised to start growing, which would fully confirm the favorable ASM reading. The combination of these favorable metrics supports ADBE’s membership as a Midrange Jumper.
Brian’s Take: As mentioned last month, the stock was a bit tactically overbought and suggested a short duration and small magnitude consolidation or pullback was likely. Well, it has occurred and was a nice opportunity to raise exposure as ADBE now looks poised to post additional performance gains.
Commentary: Adobe Inc. develops, markets, and supports computer software products and technologies. The Company’s products allow users to express and use information across all print and electronic media. Adobe offers a line of application software products, type products, and content for creating, distributing, and managing information. It has been known for brands such as Acrobat, Photoshop, and Adobe Document Cloud. Adobe serves customers such as content creators and web application developers with its digital media products, and marketers, advertisers, publishers, and others with its digital marketing business, services for video, design, photography, and the web that connect across devices, platforms, and geographies.
TPX 2.35% – Tempur Sealy International ( PLAY )
ASM Indicator: TPX’s key metric is still trying to work its way higher, and its upcoming earnings release and forward guidance will be key. Any weakness that occurs may be a catalyst to take some profit and move to another name. So, let’s stay alert on this one.
Brian’s Take: During the last update, I highlighted that TPX was tactically overbought and may experience some weakness to consolidate its gains. Well, the stock did indeed pause and has been taking a breather. It now looks poised to try for another relative run higher, especially if its ASM indicator keeps rising.
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 U.S. accounts for about 75% of Tempur Sealy’s revenue.
COST 1.47% – Costco Wholesale ( PLAY )
ASM Indicator: The key metric for COST has experienced a minor downtick following its recent earnings release, which is a disappointment. With that being said, the deterioration appears to be well-contained and will be of short duration. The stock will be on a downgrade watch during May.
Brian’s Take: The stock continues to consolidate the overbought condition since its inclusion on the Dunk’s List. I was not expecting this relative stall to take this long before the next up leg for COST. I will be keeping a close eye on this one as it needs to start showing some strength or it may need to be demoted and replaced.
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 U.S.
ISRG 0.59% – Intuitive Surgical ( PLAY )
ASM Indicator: The favorable readings discussed in the last couple of updates are still present and not extreme. Importantly, ISRG’s bars have flipped to green, which is a bullish confirmation of its ongoing ASM signal. This setup historically bodes well for forward performance gains.
Brian’s Take: Well, our patience and buying dips in ISRG have finally been rewarded. The stock made its most recent relative low in March and has since spiked higher on its strong earnings release that occurred in April. ISRG is now tactically extended and may be in need of a pause/pullback, but any weakness should be viewed as a buying opportunity.
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.
PM 0.39% – Phillip Morris ( PLAY )
ASM Indicator: PM’s key metric had a rollover and caused me to place the name on a downgrade watch. Importantly, however, its bars remain robust so it’s unclear where its ASM metric is going next.
Brian’s Take: The stock continues to work off its overbought condition that occurred at the start of the year. Its tactical metrics are suggesting the process should be nearing its end. For now, I will give PM the benefit of the doubt and with its over 5% dividend yield, it makes it easy to do so.
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.
Holds
AMT -0.90% CCJ -1.39% GM 0.49% AMZN 1.41% (HOLD)
Within the hold bucket, I am evaluating if AMT -0.90% needs to be fully removed while CCJ -1.39% may need to reinstated in a coming update.
Also, longstanding holds AMZN 1.41% and GM 0.49% will remain 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.
