Brian's Dunks
Stock List
Brian's Dunks
Stock List
June 2023 Dunks Update
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, make it 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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Market Commentary
On the macro front, my view remains little changed: Core inflation remains well above the Fed’s target and has not improved much over the past six months. The labor market is showing cracks but remains resilient. The Fed’s next move is still likely to be a hike, and the beginning of an easing cycle is nowhere to be seen despite the ongoing hopes of the doves. The profits of cyclical-relate areas still look to be high and at risk, especially with the high likelihood that the weakest economic quarters are still in front of us. Indeed, there are several key risks that are still lingering, and they should keep investors alert.
With that being said, I would be amiss not to acknowledge that there have certainly been some favorable developments.
- The VIX has fallen dramatically from both its October high of 34 and its 2023 max of around 26, and now stands below 14, which is the lowest level since November of 2021.
- Although I still remain in the “higher for longer camp” for the Fed and the final level for the terminal rate, we are certainly closer to the end game than we were during 2022.
- The economy remains resilient and is still growing.
I have tried to acknowledge the positive developments by taking my uber bear scenario off the table back in February. I also shifted away from a totally defensive sector positioning to a barbell that included a bias towards Large Cap, High Quality, Secular growth areas and upgraded Tech and Comm Services, de-emphasizing Smid, Lower Quality, and Cyclicals in February.
These changes in February were the direct result of my earnings-revisions work making extreme negative lows for all of the magnificent seven (Tech/AI-Related/AMZN), as well as the flow through to the sector 8-panels, and not a real shift in anything macro that I was seeing at that time. The setup for a bounce and relative outperformance in these areas/names was quite clear based on my ASM indicators, regardless of whether the AI buzz had happened or not. We can always debate if the speed limit to the upside has been appropriate or not, but the outperformance was going to happen, based on my analysis.
When digging deep into the health of corporate profits at the individual company level, using my single stock quantitative model that is heavily impacted by earnings revisions, one thing clearly stands out to me — WEAKNESS. According to my research, earnings are not collapsing, but forward profit expectations remain too high and still need to be lowered. In addition, economically sensitive stocks look to be the most at-risk for earnings cuts, while growthier and more secular companies are improving. When looking at size, larger cap stocks generally look relatively better than Smid. And lastly, I see lots of single stock divergences intra-sector and intra-sub-industry, which for me means idiosyncratic/stock picking is important and will add value to one’s portfolio results.
Can the equity market go up despite what this analysis shows? Yes, it can, but if you look historically, there are some caveats around my affirmative response:
- In short-term periods of oversold or excessive bearish sentiment, equities can bullishly diverge from unfavorable earnings revisions;
- However, over longer-term periods and once the oversold condition has been alleviated, the answer is really NO —
- unless an actual Fed easing cycle is imminent, as ultimately this will cause the earnings revisions to show more strength.
The bottom line here is to be mindful of what you own, what you may be buying, and what the earnings revisions look like for your key exposures, because the backdrop still does not look like the beginning of a new broad-based bull market.
Because of the incremental shifts mentioned, I am going to be making several changes to the Dunk’s List this month. The starting five have struggled because in aggregate, they were more defensive, while the Midrange jumpers have strongly outpaced the S&P 500 as they were growthier. So, I am not happy and know we can do much better. Anyone can have less-than-stellar performance periods, but making the proper course corrections can keep one from heading toward long periods of underperformance. Based on my work, I am pleased to be able to add some more dynamic and growthier companies that have great longer-term potential.
The below are my updated macro/market thoughts:
- The broad labor market is clearly 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 their path in the coming quarters, which lowers the probability of the market’s dovish Fed expectations.
- Importantly, the immediate upside potential for the S&P 500 equally weighted still appears limited, at best, while considerable downside risk remains for equity investors. Despite being tactically overbought, my work suggests that any pullback in the AI/Tech leadership will likely be a dip in an ongoing uptrend that should likely last until their ASM indicators rollover.
- 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 is still not supporting the view that a new broad-based equity bull market has begun. However, as I have been writing since February, my work does like LC, High Quality, Secular Growth areas along with some traditional defensive areas while I continue to deemphasize Smid, Lower Quality, and Cyclical areas. Stock picking continues to gain in importance. Watch exposures and risk levels while remaining opportunistic.
I have been discussing my view that using the word “market” really masks what is happening beneath the surface. The cap-weighted S&P 500 continues to rise and look quite healthy on many technical analysis metrics. However, the strength has clearly been dominated by the Magnificent 7 Large-Cap Tech and AI-related names and broader indexes — the S&P 500 equally weighed or the Russell 2000, have been laggards by a large margin.
Interestingly, my key indicators support the price divergences that have been occurring, and the large gap between the strong bucket and the “rest” suggests that this is still early in this trend. Thus, I am NOT advocating that investors buy the laggards in hopes that there is going to be a massive and sustained reversion to the mean rotation. Quite the contrary, my work supports buying dips in the winners and looking for the select few that will likely move into the strong bucket.
The back half of the year is likely to be challenging as there is likely to be more Fed tightening based on my research, the economy is set to slow further, and cyclical profit expectations look likely to be cut while the AI boom and growing optimism continues to grow. As an analogy, think about late 1999 into midyear 2000. There was a large divergence between TMT (Tech, Media, and Telecom) and the Old economy (Energy, Materials, Industrials) that went on longer and far higher than most thought was likely and possible.
I advise investors to not only be caught up with “Where is the price level for the S&P 500?”, but rather think about positioning both at the sector level and with their individual stock picking and be mindful of your overall risk levels.
Analysis
Dunks
SBUX -15.88% – Starbucks Corp. ( PLAY )
ASM Indicator: It continues to grind higher and still remains far from a positive extreme. The bars for SBUX are not sizable, but they have flipped back to green. This blend historically portends outperformance in the subsequent quarters.
Brian’s Take: As stated in my last update, it appeared that SBUX would likely need a small consolidation/pullback before continuing its move higher, and May saw the stock move lower and hold above its 200-day moving average. The stock now looks poised to begin moving higher once again.
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 2023.
MNST 0.17% – Monster Beverage Corp. ( PLAY )
ASM Indicator: MNST’s key indicator is still moving higher and has not yet reached positive extreme levels, which suggests it has more room to keep rising. Furthermore, its bars bullishly flipped to green and creates a favorable set up for further gains.
Brian’s Take: Similar to SBUX, I commented in the last update that MNST was looking tactically stretched and was looking more likely to need a pause. Well, since its May high at $60, the stock has been trading sideways. This has created an opportunity to raise allocations.
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.
ADBE 1.42% – Adobe (upgraded from Midrange Jumpers)
ASM Indicator: The key indicator for ADBE is still positively sloped and strongly moving higher. Importantly, the ASM has room before reaching a peak level. In addition, ADBE’s bars have remained green and looked ready to start growing during 2H23. This ongoing favorable combination supports ADBE’s upgrade.
Brian’s Take: The stock continued its pullback into mid-May as I warned, but that pullback created a high quality buy point as the stock has exploded over 50% since its low. ADBE is now tactically extended and will likely need another pause at some point. Hence, watch your entry point as I am viewing pullbacks as an opportunity to raise exposure for 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 is 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.
ISRG 0.29% – Intuitive Surgical (upgraded from Midrange Jumpers)
ASM Indicator: The key metric has continued to strongly move higher as I have been forecasting. Also, confirming the ongoing ASM rise has been additional green bars. Historically, this is a bullish set of events for any stock and typically leads to forward performance gains.
Brian’s Take: The longer-term favorable outlook that was part ISRG’s original thesis for inclusion is now playing out. The stock is acting well and its fundamental outlook for 2H23 is improving. Without any specific negative company news, I am viewing all tactical dips in ISRG as opportunities to raise exposure.
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.
EXAS 1.11% – Exact Sciences (NEW)
ASM Indicator: The key metric for EXAS is strongly rising and its bars have not only flipped from red to green, but they also are large and growing. This is one of strongest combinations that I see in the entire U.S. database, and it should bode well for additional performance gains.
Brian’s Take: The stock has had a big move this year, but my research suggests this is still early in a multi-year uptrend. Investors will need to watch their entry points as EXAS is tactically extended, but I strongly advise buying any dips that may occur during the summer months. The fundamental and quantitative outlook for the stock appears quite favorable.
Commentary: Exact Science is a leading, global, advanced cancer diagnostics company. It develops non-invasive tests for the early detection of colorectal cancer and precancerous lesions. Its flagship screening product, the Cologuard test, is a patient-friendly, non-invasive, stool-based DNA (sDNA) screening test that utilizes a multi-target approach to detect DNA and hemoglobin biomarkers associated with colorectal cancer and pre-cancer.
Mid-Range Jumpers
TPX -0.12% – Tempur Sealy International ( PLAY )
ASM Indicator: TPX’s key metric has paused as its recent earnings report, and guidance was in line with consensus expectations. I will have to keep this one on my radar screen for potential weakness over the month, but for now I am willing to give it the benefit of the doubt. So, let’s stay alert on this one.
Brian’s Take: During the last two updates, I highlighted that TPX was tactically overbought and may experience some weakness to consolidate its gains. During May, the stock went sideways. It’s time to either start moving up again with improving revisions or else the stock may need to get benched. Of all the names mentioned thus far, TPX is more of a hold rather than one for buying the dips — at least until there is better data.
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.
COST -0.06% – Costco Wholesale ( PLAY )
ASM Indicator: The key metric for COST had experienced a minor downtick following its March earnings release, but things appear to be stabilizing. The next step will be to clearly have its ASM indicator start rising again. I will continue to give COST the benefit, but things better firm up soon. The stock will stay on a downgrade watch.
Brian’s Take: The stock made a low in March and has slowly been grinding higher. Its upside has likely been constrained since its ASM has not shown recent strength. Like TPX, I view COST as a hold and not a “buy the dip” candidate until its data improves. I continue to closely watch this one.
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.
AMZN 2.01% – Amazon (Upgraded from the HOLD bucket)
ASM Indicator: AMZN’s key indicator finally started showing definitive signs of beginning a new uptrend late in 1Q23. Further supporting the positive inflection and favorable ASM readings was a clear shift from red bars to green. This combination is quite bullish and supports my upgrade of AMZN.
Brian’s Take: AMZN was benched back in November 2022 after horrific performance as my thesis and ASM indicator took longer to firm than I had expected. While being in the HOLD bucket, the stock stabilized, and its key indicators began to come to life. Despite the stock being tactically extended, I am moving AMZN back to the list. Be mindful of your entry point. I will be viewing any tactical weakness during the summer as an opportunity to start raising exposure.
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.
EQIX -2.22% – Equinix (NEW)
ASM Indicator: The key indicator for EQIX has clearly made an extreme negative low and has positively inflected. Its ASM is rising, and bars have impressively shifted from red to growing green. This looks like the beginning of a long, extended uptrend, which would portend healthy performance gains during 2H23 and beyond.
Brian’s Take: The stock has clearly shifted from last year’s weakness to fundamental recovery during 2023. Being a beneficiary of the recent explosion in AI-related growth, EQIX looks to be a solid play to take advantage of what appears to be an early move in a secular trend. I am advising buying any tactical weakness that may occur during the summer months and get to full exposure before the start of 3Q23.
Commentary: Equinix, Inc. operates as a real estate investment trust and is a global digital infrastructure company. The company invests in interconnected data centers. Those facilities will be increasingly crucial to supporting AI because companies will need space to store all the data used to train and run their AI programs. Equinix focuses on developing network and cloud-neutral data center platforms for cloud and information technology, enterprises, network, and mobile services providers, as well as for financial companies. Altogether, Equinix operates more than 220 data centers around the world and gets some 55% of revenue outside the Americas region.
ABNB -1.52% – Airbnb (NEW)
ASM Indicator: ABNB’s key indicator has been quite choppy for the last six months, but now looks to be in an uptrend. Its bars have been green and quite large, supporting the favorable ASM reading.
Brian’s Take: The stock got hit quite hard from 4Q21 until its 4Q22 low, being down nearly 62%. The favorable indicator set up, along with getting this fallen angel at much better valuation levels, seems to be quite attractive for a potential multi-year move on this travel-related disruptor. ABNB is beginning to get tactically extended and may need a consolidation/pullback at some point, which I will advise using as an opportunity to raise exposure.
Commentary: Airbnb, Inc. operates an online marketplace for travel information and booking services. The Company offers lodging, home-stay, and tourism services via websites and mobile applications. Airbnb serves clients worldwide.
Holds
AMT 3.08% CCJ 2.83% GM -0.13% CPB -0.39% , PM 1.17% , FANG -2.55% , RTX -0.30% (HOLD)
I am moving several names into the HOLD bucket this month as my work is flashing better opportunities. The benched names are as follows: CPB, PM, FANG, and RTX.
Within the hold bucket, I am still evaluating if CCJ may need to be reinstated in a coming update.
Also, longstanding holds GM and AMT 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.
