ProInvestor Insights - November 15, 2024 Edition

One of the most interesting and powerful facts of nature is that when measured against their counterparts, almost all things fall under a statistical bell curve. That means under the law of large numbers, ninety percent of measured items will fall into a range and are therefore essentially basically average, with five percent measuring far above the average and five percent far below the average. This is true for the height of trees, the height of human beings, scores on a round of golf, test scores in school, and, yes, basically in all things measurable. It should be obvious that if there was a quantifiable way to measure companies, we could identify the truly superlative ones.

Once you are free of simply trying to match or exceed benchmarks, you can go about identifying and investing the few individual companies that statistically come up as “outliers.” The best companies to invest in, the ones that have just entered their rapid growth period, are companies that are usually unfamiliar to the public. Even better, they are still below the radar of many professional managers at the large firms.

Often asset management companies will establish artificial barriers that prevent their own portfolio managers from investing in opportunities that are timely. Arbitrary rules are set up allowing for which companies the managers can invest in. Businesses that have been in operation for a minimum of ten years or do not trade with enough daily volume. These obstacles tend to lower returns. Magnet is open to more opportunities.

The unbiased quantitative methodology employed by our Magnet Stock Selection Process allows us to rank all publicly traded companies. Magnet ranks companies by cash flow, revenue growth, operating profit margin acceleration, and a host of other fundamental criteria and then combine this ranking system to establish a total Magnet® score. Several more levels of analysis are then required, but we are starting with elite companies.

Buying and holding the “wrong” stocks is a sure-fire ticket to the poor house. Taking small profits in companies that turn into major winners can feel equally frustrating. My answer to this dilemma is the “gardening approach” with your portfolio. This style suggests being patient and letting your winners grow, while periodically weeding out those ideas that simply are not developing.

Current Top Ten Magnet Stocks for Consideration:

(I have removed a few companies from this list that have had outsized returns since this newsletter began on July 15, 2024. They may be great companies, but the recent stunning returns do not suggest a good entry point today. Applovin is up more than 225% since July and 100% just last month. I also suggest you use stop losses. The July issue showed SuperMicro which is now down over 70%. Despite holding SMCI, the July portfolio has shown a return of 18% already. The portfolio we showed just last month returned over 21% as this note is being written. This is not sustainable.)

Top Magnet ideas for consideration:

Symbol                                    Name

  ADMA                               ADMA Biologics

   ALL                                         Allstate

  BYRN                           Byrna Technologies

   DY                                   Dycom Industries

 FOUR                                Shift4 Payments

   FTI                                      TechnipFMC

  RSG                               Republic Services

  TJX                                           TJX Cos

 VRTX                          Vertex Pharmaceuticals

 WGS                                  GeneDx Holdings

Be sure to pick-up a copy of Jordan Kimmel's books on Amazon

Please remember to sign-up for Jordan's weekly insights at ProInvestorInsights.Substack.com or MagnetInvestingInsights.com.

For further information: www.magnetinvestinginsights.com 

It’s finally over.

On the one hand, I am obviously talking about the election – it was hotly debated down to the wire, but like him or hate him, Trump won decisively. George Washington won every vote. We’ll never have another president voted in unanimously. That honor is now retired, going to our first president alone.

On the other (a bit less obvious) hand, I am talking about the end of uncertainty. A decisive election allows everyone to move on, if they can. I’m not into politics; I’m into data and investing. As an investor, all one hopes for is a decisive election. That’s what we got, and the market loved it.

The Big Money Index (BMI) is still the best metric for revealing unusually large money flows in the stock market. In October, the BMI became overbought then dropped out of being overbought after only four days. As the election tightened, investors sidestepped risk, moving money out of stocks. Then, after election day (the orange vertical line), money gushed back into stocks.

I told you this was likely, before the election, as this has been the pattern for every election since 1992.

Now, with a clearer horizon, investors wasted no time placing their bets. In fact, the day after the election was the largest single day of unusually large buying since December of 2023 (left chart). ETFs also saw immense buying, equaling the huge buying spike in July, eclipsed only by December 2023 (right chart). 

This buying decisively blasted stocks to new highs. In order to make a buy signal, stocks have to trade at new interim highs on unusually large volume. The amber lines below show stock trading on abnormally high volume alone without respect to highs or lows. You can see the big day of buying was major money moving in, also the highest since December last year.

If you have been following me, you’ll know that I have been pounding the table for small- and mid-cap stocks since early last summer. I said that, regardless of which candidate wins, these groups would benefit. But should Trump win, that’s especially good for these stocks. Sure enough, when we look at the distribution of buying since November 1st, we see 86% of stocks bought unusually, were small and mid-cap companies. This launched the Russell 2000 (IWM) into the stratosphere last week.

Out of 490 stocks that were gobbled up in an unusually large way last Wednesday, November 6th, a whopping 138 (28%) of them were financial stocks. In this chart of XLF, we can see that since October of 2023, XLF was looking to break out of a range. In January this year, it took off and never looked back.

On November 6th, the financial ETF (XLF) blasted to all-time highs on immense buying. This helped solidify Financials as the top-ranked sector. We see that in the sector charts, below: Financials clearly had the most unusual buying, while Technology, Industrials, Discretionary, and Energy stocks also saw unusual buying, breaking new high counts set within the last six months. 

Materials, Staples, Communications, and Health care sectors also saw meaningful buying, albeit without seeing new high counts. Only Utilities and Real Estate failed to see meaningful buying, but there’s a good explanation for that. Both sectors just recently retreated from highs as they vaulted with imminent rate cuts. As both pay hefty dividends, they are more in demand when rates fall.

So, now what?

For me, the playbook is always the same. I look for the highest quality stocks among those that are seeing unusually larger inflows. Last week, that pool just got bigger, making my job easier.

It’s paradoxical to find great stocks in a bad tape. On the one hand, the selection pool goes way down, but on the other hand the real leaders have trouble hiding in mediocrity. Vice versa, a strong market can make all stocks look good when they all aren’t. So suddenly, we have a lot more stocks rising, but not all have what it takes to make it into my pool of buy candidates.

When selecting my pool of candidates, I focus on using identifying stocks with soaring fundamentals, technicals and money flows. First, let me summarize some of what I look for in the fundamentals:

• Double-digit percent growth in sales and earnings over 1 and 3 years
• Double-digit percentages of profit margin
• Low debt-to-equity ratio (usually 25% or less)
• Strong forecasted sales and earnings growth
• Expanding profit margins

And here’s some of what I like to see in terms of technical strength:

• Stocks breaking new 11-week highs
• Stocks at 52- week highs
• Stocks at all-time highs
• Volume rising with price

Last, but not least, a magical trifecta comes when we get unusually large buy signals on one or more of these superior stocks. That indicates heavy accumulation of a stock. And, given that between 70% and 90% of all daily volume is institutional, according to J.P. Morgan and Morgan Stanley, we want to pay special attention when they are competing to buy the best stocks.

That stunningly simple formula has allowed me to amass a batting average of about 70% of my selections rising over time. The winners are bigger than the losers, so the aggregate outperforms the S&P 500 by 7-1 in one model portfolio strategy since 1990.

I know – it’s more fun to pick stocks when they ALL go up, but that is not realistic.

The good news is that we have a lot more candidates to look at now, as traders think a Trump presidency is good for small- and mid-sized businesses. If you add in falling interest rates removing some headwinds from capital- or borrow-intensive businesses, and we add more fuel to the fire.

I know that this election has made many people happy and many others unhappy. This election was never going to make all America happy, so I choose to focus on things I can control. I can control what stocks go into my portfolio. I suggest you do the same: Focus on how to position your investments to benefit from next year’s market realities, regardless of your feelings on the election results.

“What separates the winners from the losers is how a person reacts to each new twist of fate.”

–– Donald Trump on Twitter, December 2014, six months before announcing his first run for office.

All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.

Please see important disclosures by clicking here

For further information: www.Navellier.com

The Stock’s Rising Sentiment Means Investors are Catching On

Vimeo, Inc. (NASDAQ: VMEO), considered in the past a rival to Alphabet’s YouTube, has slowly transformed itself into a platform to produce, host and, most importantly, distribute high-quality video for professional creators and enterprises. The fundamental story, as reflected in MarketGrader’s analysis, speaks to an investment cycle that seems to be bearing fruit at the right time.

MarketGrader initiated coverage of the stock with a ‘Sell’ rating in December 2021, when it traded at $18.42. We maintained our negative rating until February 29th of this year, when we upgraded the stock to ‘Hold’ with the shares trading at $4.79 a share, 74% below their price when we started covering the company. Since our upgrade, the stock has risen 42% (through November 8th). Today we maintain our ‘Hold’ rating based on our overall grade of 55.0 (out of 100), but we think the company might be on the cusp of reporting a string of strong fundamental results, and based on recent stock momentum, investor seem to agree.

The company’s quarterly sales were essentially flat when Vimeo last reported earnings on November 5th, but its net income rose almost 10% from a year earlier, which, while definitely not spectacular, represents the continuation of a trend towards higher profits, better margins, and rising free cash flow, a far cry from the period between June 2021 and March 2023 when the company reported eight quarterly losses in a row. Given the company’s lackluster top line growth, we give it a middle-of-the-road ‘B’ in our Growth analysis.

Our Value analysis grades the stock a little better, assigning it a ‘B+’, in part because its forward P/E of almost 40 seems relatively high when compared to its EPS growth trend; however, analysts covering the stock have collectively raised their guidance for FY 2025 earnings by 220% in the last three months, which shows up in our Sentiment Analysis (more on this below).

Rounding out our GARP + Quality analysis are our two ‘Quality’ categories, Profitability and Cash Flow, where the stock earns somewhat middling grades of ‘B-’ and ‘B+,’ respectively. In profitability our biggest knock on the company is its inability to translate its remarkable 78% gross margin into much higher operating margins, which stood at 6% in the 12 months ended last quarter (9/30). Assuming the company’s positive free cash flow growth continues, as it has in the last six quarters, we expect its profitability indicators to improve materially in 2025. The company has virtually no debt and cash on hand that’s equivalent to 29% of its market capitalization.

So, in addition to this apparent fundamental turnaround, what caught our attention about Vimeo now? The stock’s remarkable rise in its Sentiment overall score of 9.6 (out of 10), propelled by very strong momentum and impressive strength relative to all U.S. stocks. Two weeks ago, before reporting earnings (and before the U.S. election), Vimeo ranked among the bottom 48% of stocks in the U.S. based on relative strength; today it’s in the top 7%. When comparing it only against all technology stocks in the country, it also went from the bottom 48% two weeks ago, to the top 11%.

The stock’s remarkable Sentiment score propelled it near the top of two of our most popular lists of ideas: MarketGrader’s Best Momentum Stocks and MarketGrader’s Improving Earnings Guidance Stocks. Assuming the recent change in market leadership in favor of small and mid-cap stocks continues, investors could do worse than to tune in to Vimeo’s stock now.
 

Visit MarketGrader today to access more than 30 lists of daily trading and investing ideas across all of the world’s stock markets. 

This month, I asked Chris Preston, Chief Analyst of Cabot Value Investor, for a value stock recommendation. He gave me a couple of ideas, but said this one is his favorite (at the moment!). And since the other hat I wear is as a real estate company owner, I thought the timing was right. After all, the housing market is looking better—lower rates are going to improve demand, inventory is increasing, and home price increases are starting to stabilize.

Here is Chris’ recommendation:

Toll Brothers, Inc. (TOL): Investing in a Luxurious Lifestyle

Recommended by Chris Preston, Chief Analyst, Cabot Value Investor

“Six years ago, in the fall of 2018, few new homes were being built in the U.S. From May 2018 to the end of that year, housing starts declined steadily from 1.36 million units to 1.09 million units, a two-year low. The reason was obvious: 30-year mortgage rates had spiked to 4.8%, their highest point since early 2011, as the Federal Reserve—in an effort to combat creeping inflation (sound familiar?)—had raised short-term interest rates from near zero at the end of 2015 to 2.4% by December 2018. New home sales slowed, so fewer new homes were being built.

“So, the Fed pivoted and started slashing rates. By the end of 2019, the federal funds rate was down to 1.5%, the 30-year mortgage rate had dipped to 3.7%, and, sure enough, new homes were being built again, to the tune of 1.55 million units, a post-Great Recession high.

“Then Covid happened, and all trends went out the window. The Fed immediately slashed rates back to near zero, but few houses were being built. Housing starts bottomed at 931,000 in April 2020, because almost no one was looking for a new home in an uncertain new pandemic world.

“The housing market was red-hot for nearly two full years, with housing starts doubling from the April 2020 bottom to the April 2022 peak at 1.83 million units built. That, of course, is when it became crystal clear that inflation was not just “transitory,” to borrow a poorly chosen Fed term. 

It was here to stay.

“By October 2023, mortgage rates had spiked to nearly 8% after the Fed had raised interest rates from near zero to the current 5.25%-5.5% range to bring inflation down from four-decade highs. High mortgage rate fatigue has taken a toll on the housing construction market, as only 1.24 million new homes were built in July, the lowest monthly tally since the early days of Covid.

“That’s about to change.

“The Fed is seemingly hell-bent on slashing interest rates fast. Historically, when the Fed cuts interest rates, homebuilder stocks are among the first to benefit. In the second half of 2019, before Covid arrived: The Fed slashed rates by 100 basis points, and housing starts—at multi-year lows at the end of 2018—spiked to a 13-year high by January 2020.

“And, in 2019 and early 2020 (before Covid hit), during which the Fed cut rates from 2.5% to 1.5%, homebuilder stocks were up 64%, more than double the 30% bump in the S&P 500.

“That’s a fair template for what could happen this time around, especially given that mortgage rates are twice as high as in mid-2019—and there’s theoretically more.

“I think we could see similar outperformance in the homebuilders this time around. And now, there’s another potential tailwind, according to an industry source who co-founded a residential development firm that builds single- and multi-family homes in the southeastern U.S.: 

“Homebuilders are attractive to me because they are no longer real estate companies,” says the source, who preferred to remain anonymous. “They are really manufacturing companies now, like a car maker, but with a greater upside on the residual value of their product.

“The big shift to me with the homebuilders,” he continues, “is that they’ve all switched their models to de-risk their balance sheets and let land developers carry inventory for them until it’s ready to go vertical. So, despite their profit margins not expanding, their IRRs (Internal Rate of Return) are materially up under that structure. So, depending on how well they’ve dealt with interest rate buydowns, their balance sheets are healthy, and they are better built to ride out volatility in the home-buying market, similar to how car manufacturers are set up.

“It’s a nice, sustainable model.”

“Sustainable is a good word to associate with an asset you want to invest in for the long term. And when that asset is on the precipice of a major potential catalyst like rate cuts, it makes for an attractive long-term investment.

“Luxury homebuilder Toll Brothers (TOL) isn’t the biggest homebuilder in the U.S. Its $10 billion in revenue last year paled in comparison to the likes of D.R. Horton’s ($35 billion), PulteGroup’s ($16 billion), or Berkshire Hathaway holding Lennar’s ($34 billion). But it’s cheaper—and growing faster than all of them.

“Now, with the Fed finally cutting rates for the first time in four and a half years, the homebuilders are undervalued, trading at 13x forward earnings. Toll Brothers is even cheaper, trading at 10.6x estimates—and growing faster than the average bear. In fiscal 2024, analysts anticipate 18.4% EPS growth on 7.1% revenue growth, both of which would easily top 2023 results (13.6% EPS growth on a 2.7% downturn in revenues).

“Those figures are expected to level off next year—to 3.6% revenue growth and flat EPS. But the company has a knack for topping EPS estimates; it’s done so comfortably in each of the last four quarters, so it’s quite possible those estimates are conservative, especially if the industry-shifting catalysts discussed above are not being factored in yet.

“TOL shares have 17% upside to our 180 price target. Up roughly 10% in the first month since we added it to the portfolio, it’s possible that price target is conservative.

“If the Fed cuts rates more than once this year (September is assumed), I think it could reach our target quite soon. But with rates likely to come down much further in the next 12 months and

with a sea change in the way homebuilders do business well underway, there’s a case to be made for Toll Brothers to be a part of any long-term portfolio. BUY.”

Toll Brothers was recently upgraded to a Zacks Rank #2 (Buy), based on rising earnings estimates, now at $14.52 per share for the fiscal year ending October 2024, an increase of 17.5%.

Currently, 46 hedge funds are owners of the stock of Toll brothers. And Bank of America just raised its price target for the company, to $165.

Although housing has had its challenges this year, the luxury housing market (Toll Brothers’ arena, prices from $400,000-$600,000) is still healthy. And with the company’s wide geographic diversification, its entry into more sustainable products (such as its recent agreement with Sunrun to provide solar power and storage to its homes), and the resurgence of the home building industry, I’d take a bet on this one.

For further information: CabotWealth.com

"Repositioning the United States Furnishings and Decor Industry with Artificial Intelligence Creates Emerging Investment Opportunities and Profit Potential"

The furniture, accessories, wall art and soft furnishings is a staid but very stable industry, always growing approximately 4.5% to 6% per annum. It is an industry that can never be eliminated. All humans need these sectors’ products. They can’t be replaced, only made better and sold more efficiently.

Improving the traditional U.S. furnishings and decor industry requires a blend of strategic innovation, technology adoption (artificial intelligence) and customer-centric practices to adapt to changing consumer expectations and market dynamics.

This is the current situation in the Furniture, Accessories and Art Decor industry in the United States. Our durable goods behemoth has lost sight of the changing needs of its large-scale real estate customers. Over the past few decades, the sector has successfully streamlined sourcing, production and fulfilment to compete with overseas suppliers in the direct-to-consumer segment. However, in doing so, it has neglected the changing needs of upmarket hospitality brands, premium office tower owners and high-end entertainment operators.

Historically, in any industry neglection spawns’ opportunity.

Gone are the days when such premier customers such as Class A hotels and office buildings were satisfied to see their facilities outfitted and decorated with slightly more expensive versions of home-style furnishings, accessories and art items. Customization is now the goal of brand-enhancement buyers. The intent is to create unique and, if possible, unforgettable­ experiences for their guests, clients and patrons. The best part is by doing so recurring revenue is created because they usually refurbish every 4-5 years. The questions are: 1) What changes are required, 2) How are “unique and unforgettable­ experiences” accomplished?

First by restructuring how, where and when products are sourced and produced in a coordinated almost “just in time” manner. Recognizing that the other segments of this industry have not been paying attention to the changing needs of the primary customer base. It presents a special opportunity to establish a coordinated supply chain, aimed at each specific customer’s needs and by doing so, substantially increase profit margins.

Many methods have been used to enhance long-standing practices, distribution channels, customer reach, and increase profit margins. But only one is revolutionary and can be adapted across every segment of this industry and that is a coordinated use of artificial intelligence (A.I.) in each product area.

Artificial intelligence (A.I.) is reshaping industries worldwide, and the home décor sector is no exception. From design to manufacturing and customer engagement, A.I. is transforming how furniture, accessories, and wall décor products are created, marketed, and sold. The integration of A.I. brings new opportunities for personalization, operational efficiency, and data-driven strategies. This shift is changing the landscape of this industry. Premier customers such as our target clients, Class A hotels and office buildings will soon no longer have to be satisfied with 30% - 40% coordinated colors with furniture covers, wallpaper, wall décor, rugs and so much more. A.I. soon will be able to construct a 100% visual coordinated experience across each of the aforementioned areas and more.

This presents a unique value opportunity in an industry that rarely seeks innovation. For inquiries: roger@principalassets.co or roger@artographylimited.com
 

For further information: www.ArtographyLimited.com

Please be aware that the investment strategies and stock recommendations provided in the ProInvestor Insights newsletter are for informational purposes only. While our contributors are experienced professionals, the views expressed are their own and should not be considered as financial advice. Investing in stocks and other securities involves risk, and you should perform your own research and consult with a qualified financial advisor before making any investment decisions. ProInvestor Insights and its affiliates are not liable for any losses or damages incurred as a result of following the recommendations in this newsletter.