To The Moon

Sergey_P

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Steven Cress, head of Quantitative Strategy at Seeking Alpha, joins Kim Khan to discuss the current stock market landscape and how it's shifted from the 1st half surge (0:25). Market rotation and more breadth - are we in a stock picking environment? Quant Ratings' top picks for H2 2023 (3:10). This is an abridged conversation from Seeking Alpha's recent Investing Experts podcast.

Transcript

Kim Khan: Welcome to Wall Street Lunch. 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 soft 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, you know a 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.

What's important to remember is, 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.

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 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 a 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.

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