To The Moon

ismagilov

Listen below or on the go via Apple Podcasts or Spotify.

Steven Cress, head of Quantitative Strategy at Seeking Alpha joins us to discuss the current stock market landscape and how it’s shifted from the first-half surge. We talk about Quant Ratings' top picks for the second half of 2023 (7:00), uncertainties in H2 that could lead to buying opportunities (13:10), a resurgent Energy sector (15:30) and screening with Quant Ratings to unearth names (19:18).

Transcript

Kim Khan: Welcome to the Investing Experts Podcast. I'm your host, Kim Khan. And today, my guest is Steve Cress, the Head of Quant Strategies at Seeking Alpha.

Steve, thanks a lot for joining us today.

Steve Cress: Thank you so much for having me. It's a pleasure to be on your podcast.

KK: So we want to look at the broader market first, or at least the market performance, what we're seeing in the second half of the year so far, we're a month-and-a-half into it versus what we saw in the first half. The numbers, we had a huge run up in certain sectors and tech stocks in the first half of the year and a very strong 16% gain in the S&P 500 for the first half and an even stronger jump of nearly 40% in the Nasdaq-100 in the first half of the year.

Now we seem to have stalled a little bit. I was just checking the numbers today going into today's trading on Thursday the 16th and we're flat on the S&P. And (NASDAQ:QQQ)'s were down about 1%. So, Steve, what are you seeing as the differences of what you saw first half and versus second half so far from what we've got?

SC: Yeah, I think the first half was a real surprise for a lot of people. I distinctly remember back last November and December, so many of the talking heads thinking that this was going to be another poor year. And lo and behold, the market has just a major rally in the first half.

And I think that rally really is, we saw it in the mega tech stocks, really the market was about five stocks in the first half of the year. That led to the S&P 500 being up about 16%. And I think that surge is led by two components for the mega tech stocks. One, a little bit of a reversion to the mean. They had to make up some lost ground for 2022. But I also think artificial intelligence is a real thing. And the mega tech stocks have a very, very good lead in artificial intelligence. So I think a combination of that reversion to the mean and AI helped lead some of those stocks higher.

What we've seen so far coming out of July and August, and I'd say even like over the last three months, there has definitely been a trend, a little bit of a sector rotation away from the mega tech stocks. Recently, we really saw a good rebound in the energy stocks. We saw a rebound in the infrastructure stocks.

So I think that market rally that we saw, which was really highly concentrated, is now beginning to expand out into other sectors. And I think that's largely based on the confidence that we're not going to be going into a hard recession or maybe even a soft recession.

In fact, as I was watching CNBC this morning, a number of the talking heads were saying, the Fed and Jerome Powell may have actually done it. They may have stuck the landing. And I think we have seen that play out of the market in terms of that rotation from the mega tech stocks to some of the energy stocks and the infrastructure stocks, which did so poorly in the beginning of the year.

KK: Yeah, I want to talk to you more about that breadth question, because as you said, we've seen a rotation. And right, we've got a soft landing pretty much now looking like a consensus. And we've also got the Fed terminal rate, maybe even reached. I mean, there's like chance for another hike down the road, but it's still less than 50% on what we got. And we've got cuts coming in maybe in the first quarter of 2024, according to Fed Fund's futures.

So, things are looking good for other sectors other than those big dominant ones that we saw, you're right, like infotech, consumer discretionary, and communication services, those are your mega-cap sectors. They're all up around 40% in the first half of the year. Right now, they're all in negative territory so far.

And we've seen, as you said, energy, which was down 7% in the first half of the year, now up 9% so far. So we are seeing more breadth. And if you look at the sectors overall, I mean, it could be – couldn't be more even. We've got five sectors down, five sectors up, one flat, and no – none of them up or down more than a single-digit percentage points.

So what can our listeners and Seeking Alpha readers look for in this environment? I mean, it's going to lend itself more to a stock picking environment, I would think.

SC: Yeah, I would agree with that. And I have to say from a quant perspective, I actually try to listen to the talking heads as little as possible. Really, what we do from a quant perspective is we're constantly, every day, every week, every month, we're looking for stocks that are very strong on fundamentals.

And sometimes stocks that are strong on fundamentals could go against what the talking heads are saying from a macro perspective. But over the long-term, that's where you find mispriced opportunities. So we really like to stick with our quant model.

And for those of you that are new to Seeking Alpha Quant, the basis of the system is that we look for stocks that are collectively strong on the characteristics of value, growth, profitability, momentum, and positive analyst EPS revisions. I could say conversely, we’re – we have stocks that are strong sells, or sells, we're looking for stocks that have those poor EPS revisions.

So pretty much antithetical to those metrics that I mentioned, the value, growth, profitability, momentum, and EPS revisions on the long side. We're looking for those to be collectively strong. And on the sell side or the bearish side, we'd be looking for them to be weak.

In the beginning of the year, we had an article that I wrote, which was the Top 10 stocks. And it looked like a shaky start in the beginning of the year because the mega tech was doing so well. But really, between the beginning of the year and now, the stocks – those Top 10 stocks have performed extraordinarily.

On a whole, the Top 10 stocks are up about 38% from that article. Some of the top performers were stocks that were almost at the time completely unknown. The best performer was Super Micro Computer (SMCI). It's up 217% year-to-date.

Another stock, and this speaks to sort of broadening out, not just in the tech sector, was Modine Manufacturing (MOD). That stock is up 119%. And then we had a Chinese stock, which people were really against it at the time, it is MINISO Group (MNSO), and that stock is up 88% year-to-date.

So we've had some really good performers that are really Super Micro was in the tech sector, but it was not a mega tech stock. And on the whole, that portfolio has done really well.

The timing is perfect now. We just recently published another article which is the Top 10 stocks for the remainder of the year. And I'm pleased to say some of those names, just since the beginning of July, have done incredibly well.

We recommended Sterling Infrastructure (STRL), and since July, that stock is up 40% just in the last four weeks. We recommended Extreme Networks (EXTR), that stock is up 15%. And we recommended M/I Homes (MHO), which is up 8%.

So what is, I think, a little bit interesting about this, we've had a pullback in those mega tech stocks in, I'd say really June, July, August, and the model really picked up to the pullback. So many of the mega techs did well early in the year, then they pulled back. So the model actually started recommending Google (GOOG) and Meta (META). And this – it's like the first time in years that those stocks have made their way to strong buys in the model.

Now, of course, they did have a really good beginning of the year, and I mentioned that was a bit of a reversion to the mean because they lost so much performance in 2022. But what we've seen with these, especially Meta, has been really interesting because they had a huge problem with basically ballooning expenses with the Metaverse.

And I think what they did really well was get those expenses under control and they've really, you've seen their traditional advertising business pick up, but you've seen them make really great headway with artificial intelligence. And that's the same thing that we've seen with Google, pick up in their traditional advertising, but also really making headway with artificial intelligence as well.

So we've come across a point where the first time in years, the valuation framework for these stocks looks very attractive from a quant perspective, which we have not seen in a long time, but simultaneously, the growth has actually picked up over what we saw in 2022. So we have a number of interesting stocks in that Top 10 for the second half.

KK: What other stocks and sectors are kind of popping up for the second half then?

SC: Yeah. So outside of Meta and Google, the other tech stock I have is Extreme Networks. That stock has definitely been on a surge, that’s up about 46% year-to-date and up 115% over the last year.

Now, you may say, okay, with stocks making those kind of moves, aren't you like chasing momentum? Well, the fact is that these stocks have been demonstrating good earnings. And when the earnings are there and the P/E ratio is attractive, the historical price performance to me is just more a validation that the company is doing something well.

As long as the valuation framework is there and the growth is there, I'm not concerned that these stocks are up 40% or 200%. As long as the valuation is attractive and the growth remains attractive, it's a stock that we'll be recommending.

Another sector that's done really well, and this is kind of counterintuitive because mortgage rates have gone up so much, but home builders have done really well. I mentioned we have M/I Homes, and that stock has had terrific performance, and also Green Brick Partners (GRBK).

And last year, like real estate was one of the worst performing sectors, I mean, year-to-date, and homebuilding has been a great performing sector. M/I Homes, as I mentioned, one of our picks is up about 100%, and Green Brick Partners is up about 115% over the last year. So it's a testament that what these companies are doing is working despite mortgage rates going up.

And really, it’s – if you’re – you don't have to do a lot of research. You know, for existing homes, with mortgage rates going up, sellers don't want to sell because if they sell and they need to get a new mortgage, they're actually paying more. So they're very resistant to selling their existing homes.

So this really opens it up for the homebuilders, which would sort of subsidize mortgage rates. And that's one of the reasons, especially in the faster growing parts of the country. And as people get out of cities like New York and San Francisco and go to other parts where these home builders are, their business has been exceptional.

There's another company which is really industry-related, industrial-related, it's Sterling Infrastructure. They're focused on construction and engineering as well. And they undertake everything from projects on highways, roads, bridges and airports and many more things along those lines.

Sterling, the performance so far, just we added that to our Alpha Picks portfolio in the beginning of the month. And already, over the last four weeks, Sterling is up 40% and it's got a P/E ratio of just 16 times.

So there are a number of industrial companies that we really like, too. And then again, it's broadening out from that IT sector and the communications sector. We really see the market broaden out. And some of the stocks that we like and have done well are American Airlines (AAL), Delta (DAL), and Carnival Corporation (CCL). And obviously, these were some of the worst performing stocks during the pandemic, but people have come out of the pandemic with a vengeance to travel, and these companies are doing incredibly well.

So that sort of rounds out the stocks for the Top 10 for the second half of the year. And my expectation is just as we saw in the beginning of the first half, we could see some weak performance. Obviously, the market was up about maybe 3% in July, but it's actually tapered off into August.

There are some big events that could put uncertainties in front of the market. And when there are uncertainties there, these stocks could get a little bit cheaper. We saw that when we wrote our article and it's all about sort of identifying these stocks when they're mispriced.

So I would probably use any weakness that we see in September and October, which historically are very, very bad periods for the market. And if you add uncertainty on top of it, and some of the uncertainties that you have, have to do with port strikes in September, the student loan payments have to resume, and for a lot of people that's going to be incredibly painful.

So there are a combination of things out there that could offer uncertainty going into September and October, and I would probably use any weakness in these stocks as a buying opportunity.

KK: Yeah, you mentioned the cruise line stocks and the airline stocks that you had. And it is fascinating the amount of pent-up demand that there was for travel that has kind of really driven great numbers and bookings numbers for these companies. And people keep waiting for the U.S. consumer to kind of stumble completely, but then you just saw this blowout retail sales number. So it's a very interesting economic landscape where things are still motoring along. There's looking at like, maybe below trend growth. It’s kind of the definition of a soft landing, but that's still growth. It's still landing, but it's also still growth.

So I guess, yeah, that's a lot to take into account about how you think it’s going to – the rest of the year is going to go play out.

I kind of wanted to talk to you a little bit about the energy sector. It's a tough sector to gauge because it is, with its low weighting in the index, and it's pretty volatile, but we saw really kind of miserable EPS growth numbers in Q2 for energy companies overall.

They were, in the basement as far as other sectors, seeing EPS growth. But they have led – the stocks have led so far into the second half of the year. That's a lot to do, obviously, with oil prices rising as they have been. But are there any names that have popped up on the quant radar for that?

SC: Yeah. You mentioned energy has performed really well. I think, like in the last four weeks, large-cap energy is up about 7.62%, but the small-cap energy is up almost 11.5%.

So, I think we actually could see, as the market broadens out, I think we can see some of the energy stocks performing well, too. You have the Saudis cut back on production, and that actually did usher in oil getting a little bit higher.

I don't think you're going to see the federal government doing what they've done over the last year or two, especially during the pandemic, which was releasing the strategic petroleum reserves. So I think that's sort of setting the market up to take more of a natural formation.

In the energy sector, some of the top stocks that we have right now, there’s – the #1 stock is called, and it's a really small-cap stock, is called StealthGas (GASS). It's only got a market cap of about $200 million.

On the larger side, you have Weatherford International (WFRD) and you have Teekay Tankers (TNK), which has been a strong buy for quite a while. And that stock – the Tankers, you have to be really careful. You want to purchase it at the right time. And the stock has – that’s definitely been picking up some momentum. There's Marathon Petroleum (MPC), which we continue to like and have a strong buy on that. There is – that's a large-cap stock.

Another sort of mid-cap stock would be Gulfport Energy (GPOR), around $2 billion. So there's a really, like when you look at the energy stocks, we have a screen. If you're one of our Premium customers, and you go to the screen and you bring up energy stocks, what I really like about it is there's a great mix of small-cap, mid-cap, and large-cap energy stocks there.

And this is a sector that did really well by quant in 2022. Our overall model, when you looked at the top stocks, it was really energy heavy, and that started actually in 2021. And I almost had to do a second take because when we were sort of in the midst of the pandemic and energy was getting completely slaughtered, the numbers on a lot of the energy stocks that we follow really – the revisions took place very quickly down and then back up. And I was surprised to see how quickly the earnings revisions took place to the upside.

And when that did happen, the top of our screen overall was loaded with energy stocks. And as a result, our strong buys last year, the performance crushed the market. We really, really outperformed the S&P 500.

And then when we sort of came into this year, we saw a broadening out of the top stocks. But what I'm liking and seeing just the energy sector now is again sort of a breadth of small-cap, mid-cap and large-cap stocks.

So I would definitely say take a look at the stocks, see what is good. People have to sort of take into consideration what their risk is. They may not want the small-cap stocks or they may want the risk of the small-cap stocks. But we have some really strong quant ratings on a lot of energy stocks right now.

KK: Well, you mentioned screens and so that's a great segue because I was just about to ask. I mean, the screening tool that we have on Seeking Alpha is by far and away my favorite feature that we have and I use it all the time.

I love screening for certain sectors and then seeing what quant grades for, going through like say, top grades on valuation and momentum. But you're the expert, you're the quant guy. What – do you have any favorite screens that you like to use on a kind of regular basis?

SC: The screens are addictive. I tell you, when you start getting familiar with the Seeking Alpha platform, you find you're on it multiple times a day if you like stocks. And the screening aspect of it is fantastic because we have a number of ready-made screens, which are all the sector screens.

And you could take a look at any stock, or you could just do it, run a general screen on the overall universe of stocks and that's like readily available, too. You just click on top stocks. But the beauty of it is whether you're looking at something that we have that's pre-baked or the sector screens, you have the ability to make changes to it.

So you could change market cap, or you could change parameters for valuation, or growth, or profitability, and really tighten up the range that you want. So you could just find stocks that have all straight As or have valuation metrics that are like below maybe a multiple of 15 times or growth metrics that are above 20%.

So it really, it's dynamic and you could work with the preset screens or you could start editing it and making your own parameters. I – like on a daily basis, I look at the top stocks. I also have grades on ETFs. So there's a screener for the ETFs, so you could see what ETFs are doing well and are the top rated ones overall, or you could do it by asset class too, you could break it down.

So the screens are completely addictive. And the other addictive aspect is you could load up your own portfolio and see what the grades are on the stocks in your portfolio. And that's something that you look at all the time.

And if you have a stock where it comes up as a sell and the valuation grade might be a D or the growth grade might be a D, you're one click away from finding another stock in that same sector that's a similar stock, but has straight As across the board and is a strong buy.

KK: Yeah, what I'd like to do is also take some other research if I'll find some notes that I'm getting or writing up for the news team, I'll say, oh, look, these are listed as like the most out of favor or most in favor with long-only funds or most shorted by hedge funds and kind of match them up on how they're doing with our quant rating system. And you can get some interesting discrepancies of like of the – and opportunities, like entry points, I think, to get into stocks that way.

SC: Yeah. And what's important to remember is like, we're talking about our platform, but we’re – I'm not talking up the platform, it's purely a data-driven process. So if you're interested in stocks, you have to look at the data. And I think what's really wonderful about the platform is that we actually interpret the data for people.

And you could go to Bloomberg or Reuters or FactSet, and they will provide you with the absolute data, but they don't interpret that data, and we do. And simply, the interpretation is just taking a look at a metric for a company and comparing that same metric to the rest of the sector and showing you what's strong or weak. So it's simply just interpreting it based on a data-driven process, and it's amazing what comes through in that process.

KK: So I don't know if you have the data to answer this last question, but I'm going to throw it out anyway. Do you think we see a kind of resurgence in the AI trade and the big tech trade going through the end of the year? Or does it look more to you in your experience like we're going to have a more broader rally kind of going into the end of 2023?

SC: I try to avoid sort of commenting on the market overall, because for me, it's just about seeing what's coming up in the quant model every day. And, of course, we definitely, we'll see trends in the quant model. So we see like industrial stocks doing well, homebuilders, energy stocks coming up.

But I didn't mention, I think there are a number of potential issues for the market in the next two months. And I think that we're beginning to see the market sort of taper off from that big rally that it had. And I think between potential port strikes, even like strikes what we're seeing with the writers, inflation is starting to come down, but usually people find inflation is sticky.

So, not every single month we're going to see deflation occurring. We're going to see periods where some of those in inflation numbers are sticky. So I think that's something to pay attention to.

But I do think overwhelmingly, we are seeing earnings more positive with breadth across the market. And I think towards the tail end of the year that is supportive of the market doing well.

And I think it's supportive of 2024 as well, especially if we come into period where we find that, the Fed will cease the rate hikes and maybe even potentially like bring them down. And I think that's going to be helpful for the broader market. I feel like there's a question there that I did not answer that.

KK: Well, I can tell you for the record on quant rating, well, (NYSEARCA:SPY) has currently got a Buy on it and QQQ has currently got a Strong Buy. So our listeners should definitely log on to Seeking Alpha, see why those ratings and check that out.

And Steve, is there anything else you'd like to add for our listeners?

SC: I just would want to thank you once again for having me on your podcast. It's a great show and hopefully what people heard today is informative.

KK: It's been a great pleasure. Thanks, again, for joining us.

SC: Thank you so much. Have a great day.

KK: Thanks for listening to the Investing Experts Podcast. Nothing on this podcast should be taken as investment advice of any sort. At times, myself or my guests may own positions in the securities mentioned.

For full access to transcripts, as well as analyst ratings, stock quant scores, and dividend grades, subscribe to Seeking Alpha Premium at seekingalpha.com/subscriptions.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.