6 Fundamentally Strong Beaten-Up Stocks

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Steven Cress talks volatile market environment and fundamentally-focused quant investing (0:45). VIX surge, sensitive markets, lower rates (5:00). Longest yield curve inversion in history (9:35). Fundamentally strong beaten-up stocks (19:00). This is an excerpt from a webinar published on September 27.

Transcript

Daniel Snyder: Hello everyone, I’m Daniel Snyder from Seeking Alpha. Today, I am joined by the VP of Quantitative Strategies, the man, the myth, the legend, the one that you tune in to see and get some nice quantitative research from, Steven Cress.

He’s here joining us today, and we’re going to go over six beaten-down stocks. I want to talk some stocks, Steve.

Steven Cress: Daniel, thank you for that. I appreciate that. A very warm welcome and taking care of the housekeeping as well. But let’s talk stocks.

So first, we’re going to dive into it. Daniel, we’ve been doing these webinars for a long time. And I think you know, really, even back in April and May, I started warning people that we were going to a really volatile environment and we did. And this has been our mantra since May.

So it’s amazing that the stock market, the S&P 500 is actually up about 20% year-to-date. It doesn’t feel that way, like we have been whipsawed all over the place. The first quarter was pretty calm, but like after April, we just had fairly large corrections, fairly large rebounds, larger corrections, bigger rebounds. It’s been all over the place.

So that brings me to the point of what we try to do. As Daniel mentioned, I am the Head of Quantitative Strategy at Seeing Alpha. And really what we look to do with our Quant is to help eliminate emotion from investing and help you uncover top stocks with very strong fundamentals and not to be persuaded by fear or investor sentiment or some of the talking heads that flip their opinions every single day.

Our Quant is a data-driven process, and we really look to stocks with strong fundamentals in our methodology for picking stocks.

So we’ve had some turbulent times, but turbulent times do present opportunities. And that’s exactly what we wanted to do with this article that we featured on August 19 was to turn your weaknesses into opportunities. And at the time, the markets were going into a bit of a corrective phase, and some names that we really liked had pulled back.

So how do we achieve our results? Our Quant has a very strong track record. There are two areas that we measure. One is our overall Quant recommendation. So on any given day, we have about 450 Strong Buys. If we backtested going to, say, 2010, our Strong Buys have outperformed the S&P 500 and that’s rebalancing them every single day. So we’re not cherry picking there, taking all our Strong Buys every day, rebalancing it. Going back to 2010 for the last 13 out of 14 years, we have outperformed the S&P 500.

We also have another product called Alpha Picks, where we just select our two favorite stocks every month, and that has significantly outperformed the S&P 500. We’ve been doing that for two years.

So how do we do it? What is quantamental analysis? Well, really Quant, for me, it’s the same thing as fundamental analysis. So we have ratings, which go by Strong Buy, Buy, Hold, Sell, and Strong Sell. The way we measure companies is we take a look at each company’s cash flow, balance sheets, income statements, and hundreds of financial metrics.

And for each stock, we take those data points and we compare it to the rest of its sector. This way we can decide once we score up all those factors, the companies that are the strongest and the weakest, and we rank them so from nearly all U.S. securities and many, many ADRs across the world. We have close to 4,800 stocks that we rank based on our Quant system.

The essence of the Quant system, the overall Factor Grades that we look at, which I really call the mother’s milk of investing, is Growth, Valuation, Profitability, and we also look at Momentum and EPS Revisions. So those are the five core factors that we measure companies on, and there are many underlying metrics within those factors that we score and rank.

So as you’ll see on our platform, our grading system goes A+ through F. So for each metric for a company, you can instantly see how it ranks compared to the rest of its sector based on those grades.

There’s some other things we want to cover, just to give you a sense of where we are in the overall market and the overall economy. As I mentioned, it’s been a very volatile period, but we’re also at record highs. So the market is just whipsawed in many, many different directions this year.

So we’re going to cover a sector performance and different business cycles that we’ve hit from last year to this year and where we’re at now. And we’re also going to feature six beaten-down stocks that have very strong fundamentals that have not fully recovered with the rest of the market at this point. I’m also going to show you how to find those beaten-down stocks, so you can do it on your own.

We use the VIX Index, ticker symbol VIX. And the VIX hit almost a record high back in July. There were only two periods recently, and recently being the last 20 years, where it had hit those levels. One was the financial crisis back in 2008, and then the pandemic, which was a few years ago.

So we had an economic number come out back in July for labor, and it was a growth level. And the labor market was growing, but the growth level was a little bit lower than the markets had expected. And the markets went absolutely haywire, pulling back with a huge correction, the VIX surged.

The market is very sensitive. It’s been walking on eggshells for the better part of two years. So economic indicators can throw the market in any crazy direction.

What we’re dealing with right now is we’re coming into a period where the Fed just lowered rates for the first time in many years after hiking rates. Obviously, we’ve had inflation that we had to deal with in 2023, and we’ve had inflation that’s come down in 2024.

But each time inflation data came out, the market wasn’t quite sure how sticky inflation would be, would it trend down, would it not trend down. So there’s a lot of nervousness over the course of this year, if the Fed was actually going to start to take rates down, and when they did, by what level.

So obviously, a couple of weeks ago, the Fed took rates down by about 50 basis points for the first time. So inflation concerns are easing. Interest rates have started to ease as well. We’ve had an inverted yield curve, which has finally gone back to sort of a normalized yield curve after a really long period, and there’s still focus on the job growth. And, of course, we have the elections coming up in November, and there’s geopolitical events with Ukraine and Israel.

So there’s a lot that makes the market nervous. But when data points look fairly good and it looks like the Fed’s going to take rates down, that pleases the market. So it rallies when it feels that way.

And touching base on the presidential election, I like showing this graph here because you can see that it really does make a fairly large difference when you’re in non-presidential election years versus presidential election years. And you can actually see, going back to 1976, this is the S&P 500 seasonality from 1976 to 2023. And it shows you the performance of the market during election periods versus non-election periods.

So you could see it is an overhang. It’s a gray cloud over the market. It creates uncertainty, and the market does not perform as well as it could be when you’re in those non-election periods.

So year-to-date, because of problems that we’ve had with interest rate fears, inflation fears, geopolitical events, and the election, you could see that year-to-date, and this is very, very rare, utilities has been the best performing sector. It’s up 25.94%, communication services coming in second. And really like traditionally, before we were in the big tech area, utility companies and big telephone companies, those were the safe havens. That’s where people would go, in the big pharma companies and consumer staple companies.

So whenever the market was nervous as it has been, that was the trend. But you could see – still see the utilities, it is a safe haven, it is where people go, and you can see the poor performing sectors. And this is very typical when there’s fears that you’ll be going into recession. You could see energy has only been up 6% year-to-date, not being a good performer and basic materials up only about 12%.

Taking us to the next slide, these were the sectors that led in 2023. So you could see technology was up huge, led by the Magnificent Seven. The tech sector was up 56% in 2023, and consumer discretionary was up 39%.

So there were inflation fears and interest rate fears. In 2023, the market wasn’t worried about a recession at that point. More of the recession thoughts came in really this year. And you could see how the markets have played out and the rotations that have occurred. So again, last year, tech and consumer discretionary leading the market, and obviously, fears coming into place in 2024. So utilities leading the market.

So I wanted to highlight the yield curve, too. We’ve had the longest yield curve inversion in history, which just ended. So right now, we have the 10-year treasury at about 3.8% and the two-year treasury at 3.62%. As you could say from this chart, this was a very, very long period that the yield curve was inverted.

And what that means is that the shorter-term treasuries, which would be like two-year treasuries, had higher yields than the long-term treasuries, such as the 10-year treasuries. That is really normal. And I think that speaks to the environment we have been in, which has been an – a normal environment.

Finally, we’re getting to a normalized yield curve. But when that happens, when you get to a point where you have a normal yield curve after a long period of being inverted, and you have central banks and the Fed taking interest rates down, that usually in the past has been a red flag that you’re going to go into a recession.

So I want to address that. Will there be a recession? As I said, historically, when the yield curve normalizes after prolonged inversion, market volatility tends to spike due to heightened fears of an impending recession. So no doubt we saw in July the VIX went up to 62. We’ve seen fairly large corrections, fairly large rallies. That is definitely volatility.

So yield curve inversion is typically a warning sign of an upcoming recession. When it returns to normal slope, it can be – mean that a recession is imminent or already underway. I think we’ve actually seen growth and inflation coming down in certain areas, but we’re not really seeing signs of a recession. Economic growth is still too strong for that. And it looks like the Fed may get this Goldilocks scenario where we have a soft landing, barely touching into a recession.

Interest rate expectations, the normalization of the yield curve usually reflects in interest rate expectations often due to central banks lowering short-term rates to stimulate the economy. So we’re certainly going into that phase now where the Fed realizes things are slowing down. They do need to stimulate the economy, hence the 50 basis point cut that we just saw a couple of weeks ago. Often that can provide temporary relief to the markets.

Sometimes right prior to the Fed bringing rates down, fears and uncertainties are the greatest of the markets come down. Usually, the week after the Fed takes the first cut, the markets are a bit soft. And we saw a rally, then we saw some softness, but now we’re actually seeing the market, it’s starting to get stimulated again, and the market is looking forward to rates continuing to come down going forward.

If the market believes the worst of that economic – if the market believes that the worst of the economic downturn has passed, stocks may begin to recover as the economy stabilizes and growth expectations improve. This rebound could take time and it depends largely on the broader economy.

So we see rates coming down. We still have some uncertainty with the election coming up. So we have had a bit of a rally as that uncertainty goes into the election period. That could make the market soften up again. Obviously, events in Israel could make the market soften up. But for the most part, it looks like the Fed’s on a good course for taking rates down, and that brings me to our next slide.

So this slide shows you where interest rate traders are sort of voting on the upcoming meeting. So in 41 days, we have our next FOMC meeting. And the current rates are at a range of 4.75% to 5%. So interest rate traders are basically voting here. You have about 48% that are looking for a 25 basis point cut, and you have 51% of the traders looking for a 50 basis point cut.

So this comes to be a statement that 100% of the traders believe that we will be easing. None of the traders feel that we’re going to stay at the current levels. So all the traders are looking for either a 25 or 50 basis point cut in the next 41 days at the next FOMC meeting.

So we just had sort of that first rate cut. This might surprise some people. A lot of people think the market tends to rally really strongly immediately after. Historically, we could see going back to 1994 that the first week after the rate cut, the market’s actually down, but in the month following, the quarter following, and the year following, you could see we’re off to the races.

So it could be time to get your rally hat on. Again, there is some uncertainty with the election coming up. So there could be more periods where we have some slight pullbacks, especially as data comes out and it’s mixed in with a blend of uncertainty over the election. September is also an awful month for the market.

When you look at this, we go back 10 years, and you could see during the month of September, the market only has a 30% win rate. That means it basically loses 70% of the time during the month of September. You could see most other months of the year tend to trend up. December often could be another week month, but it’s up 60% of the time. In December, it’s just on average, the market pulls back.

Sometimes you have selling going into the end of the tax year, and that often could be a result for the average return to the market not being that high in December. But September, historically, an awful period. And why does that happen? There are a number of reasons. And it’s actually forward-looking to October, which you could see, October, 60% of the time is up, but some of the worst market events have happened in October.

So we had in October 1929, you had Black Tuesday. That was probably one of the most famous crashes that brought on a very long depression. Then you had October 19th in 1987 known as Black Monday. That was the largest single day correction. And then in October of 1997, you had a sharp correction due to an Asian crisis. And then in 2008, you had a huge drop as we hit the financial crisis. So sometimes the market gets really skittish in September, sells off as we come into October.

DS: Hey, Steve, real quick, would you mind going back to the slide before that you’re showing the seasonality. And I want to make sure we highlight this as well, because we’re talking about the upcoming election a little bit here as well.

So if we go down and actually look at the years 2020 and 2016, this is setting up exactly what the history has shown us. Right now, history doesn’t always repeat. Sometimes it rhymes, sometimes it doesn’t. But in both of those election years, look at October, look at November, and November has that pop after the election. So just something to keep an eye on. I mean, 10% in 2020, it’s nothing to sweep under the rug.

SC: Yeah, Daniel, I’m actually really glad that you brought that up. I mean, I pointed out that previous chart, but you could really look just at the data points over here, more of a recent history, 2020. You’re right. September and October, both combined have been awful months during those elections, and that just highlights the uncertainty.

But part of what we want to highlight today is you buy low and you sell high. So for those who are not afraid to take on a risk when the markets are declining, you’re often the individuals that will get the highest returns. Because those corrective phases, the market always comes out of it.

The market always returns to fundamentals. It’s not typically driven by fear. For long periods of time, there are cycles where you have fear that drives the market. But the market always goes from fear to fundamentals and that’s when you see it return.

And as Daniel highlighted here, in both 2016 and 2020, during November, we saw really nice pops to the market. In 2016, there was a 3.7% pop and almost 11% in 2020, as Daniel pointed out.

So when we’re looking back at August, when we wrote this article in August ‘19, that was a period where we had a pullback. The market has rallied since then, but my statement is the same. Stay calm, carry on. We still have the election in front of us, okay? We still have economic data points. There could be more volatility.

So be mentally prepared for this volatility. Look for opportunities. You’re still at a point where you may want to loosen up on speculative holdings. And speculative holdings would be stocks that don’t have good fundamentals, where it’s basically a blue sky scenario. Maybe they have no earnings, no revenues, but you’re waiting for a big product to hit. Those are speculative holdings.

Look at stocks that have strong growth, good valuation frameworks, good probabilities, where the prices have lightened up a little bit due to the fears that are hitting the market. So as I mentioned, the market always returns to fundamentals, but stocks with strong fundamentals, they typically rally back very, very fast.

So August 19, this is where we were, Daniel. You can see when we wrote that article, we actually had a really big pullback. And that’s when I was highlighting, hey, let’s take advantage of this, okay? We have really strong fundamentals on some of these stocks, and that’s why we wrote the article.

So we had six stocks at the time that we wrote about, and they have had huge returns since August. So don’t worry, we still have six beaten-up stocks we’re going to show you today, but these were the stocks that we wrote about on August 19. There was Sterling Infrastructure (STRL). Since August 19, the stock is up 30.6%. We had Trip.com (TCOM) that we wrote about, that stock is up 32%. We had Corporación América Airports (CAAP), which is up 12%. Carnival Cruise (CCL), which is up 20%. And then two stocks which have been laggards, Twilio (TWLO), and Amphastar Pharmaceuticals (AMPH).

So being that the focus of this presentation is for six beaten-up stocks, four of the stocks that I wrote about, we’re going to take off the table here. We’re actually going to give you four more ideas that really is sort of an exclusive in this webinar that we have today, because we wrote about that article on August 19, and four of the stocks have already had huge returns, double-digit returns.

So I want to present to you some stocks that have not had that kind of rally. So we’re going to be keeping Twilio and Amphastar, but we have four more that we’re going to bring your way.

So we have stocks that have pulled back are Celestica (CLS), which is an information technology company; Abercrombie & Fitch (ANF), which is a very known retailer in the consumer discretionary sector; Virco Industries (VIRC), which is an office service and supply company; and Toyota Motor (TM), which is an automobile manufacturer. Most of those stocks have weakened up in the last four weeks or three months or on the year.

But as you could see from these Quant Factor Grades, which I highlighted earlier, these Factor Grades give you an instant characterization of how a stock looks on these metrics versus the other companies in their sector. And you can see there’s a really good grades for these companies. And really, like when you look at Toyota, the valuation compared to the rest of the sector is an A.

So it means it’s got a much better valuation framework. It’s got much stronger growth than the rest of the sector and much stronger profitability. So I’m really happy to be bringing Toyota to light here. The stock actually had a really good run earlier in the year, the first quarter, even going into the second quarter, but then it pulled back in a major way. So that’s part of the beaten-down scenario that we’re looking at there.

So I want to show everybody how we do this. So after this call today, four weeks from now, two months from now, the stocks that we’re recommending may rally. So I want to give you an idea how to find these stocks.

So I’m going to take us to our platform, Daniel. And this is Twilio, which we’re going to discuss in a little bit more detail. But if you’re a Seeking Alpha subscriber, you just go to the left-hand rail, and you can click on Top Stocks. And I’m going to show you how easy this is.

So this is going to bring up some of our favorite stocks. When you look at top stocks, this is sort of a trifecta here. And the reason why I call it trifecta is you have three independent research validation measures.

You have the Quant Rating, you have the independent Seeking Alpha contributors, and you have the Wall Street Ratings. Those are three independent sources that are rating the stocks. And you can see these are Buys and Strong Buys across the boards. So you can go down this list here and find names that are favored by all three.

But if you want to find beaten-up stocks, all you have to do is click on performance, okay? And you could find some of the stocks that have had a pullback. Now, all these stocks, when you go to the Summary page again, you’ll see that they’re very strong Factor Grades, Value, Growth, Profitability. So you know that’s telling you that these stocks have strong fundamentals. But if you’re looking for a few of these stocks that are beaten up, you just click on the Performance page and you scroll down and you can see where some of the names have like pulled back.

So all you have to do is click on the stocks and take a closer look and you’ll be able to dive into the Growth, the Valuation, the Profitability within one click. So it’s that easy. That’s how you can find names that are beaten up.

So we’re starting with the presentation here on the six stocks. Twilio is one of them, ticker symbol TWLO. It is ranked number three in terms of our Quant Ratings for Internet service and infrastructure stocks. This is a tech-enabled engagement platform.

And the interesting data points that we’re looking at is it’s got forward EBITDA growth of 49%. It’s got cash from operations of $832 million. And in the last 90 days, 27 analysts have revised their earnings estimate up for it.

When we look at it on a PEG basis, it’s at a 67% discount. PEG is when you combine, it’s one of my favorite metrics, it’s when you combine P/E and the growth rate into one ratio. So you’re looking at both valuation and growth combined. And looking at that metric, it’s at a 67% discount to the sector.

You can see the performance though recently has been picking up versus the sector. So if you’re looking at the lower left-hand side here, you can see a B+ for the three-month price performance and for – a B- for the six-month. So the absolute performance for the stock is up 15% for the last three months versus the sector up 1%.

But then when you look over one-year performance, you can see it’s a C+ grade. It’s actually underperformed the sector. So this is where we’re looking at the stock that has not performed well. You could see the stock has had a major, major pullback from sort of the December, January timeframe.

And that’s why we’re saying, hey, take a look at this stock. It’s a Buy. It’s got a good valuation framework. It’s got a good growth framework. It’s got a strong profitability framework.

And you could see now in recent weeks and months, it is starting to appreciate even more so than the sector. And that’s why I want to get people focused back on this stock again. They came out for a period where earnings were a little bit weaker-than-expected. That was back in the February timeframe, but the stock has since sort of recovered and stabilized. So it’s a good name to take a look at.

Taking us to the next stock, Amphastar. So these are the two stocks that remain in my six beaten-up stocks. These still I consider them beaten up. Back in January, it was trading around $62. It’s now currently around $47.88. But again, it’s sort of picking up recently. This is a Buy as well.

If we take a look at the valuation here, you can see this is really cheap versus the sector. On a P/E basis, we’re looking at a multiple of about 11x compared to the sector at 21x, it’s at a 44% discount on a P/E basis to the sector.

And the sector it’s in is healthcare, the industry is pharmaceuticals, so you could see exactly where it ranks. So remember the purpose of this is not necessarily to pick the top stock in the industry or sector, we’re looking for stocks that are beaten-up that have good potential. So here, we’re looking at the valuation framework.

If we look at the growth framework for the company, there’s a lot of green here. And we’re seeing like As, mostly As across the board. The forward revenue growth rate comes in as a B, but that’s a strong forward revenue growth rate at almost 18% versus the sector at 8%.

If we take a look at the EPS forward rate, that’s an A- grade. The EPS growth rate is 35% versus the sector at 10%. That’s a huge premium. So Growth and Value look really strong on the stock. And if we look at Profitability, you can see there are a lot of As and Bs here as well. The EBITDA margin is 39%, return on equity is 25%.

The healthcare sector has an awful return on equity overall. It’s a negative 39% return on equity for the healthcare sector. So this stock looks like an absolute star. That’s why you can see it’s got that A+ right there.

So some great data points. Again, Quant is a data-driven process. We’re really not like looking that much at what the talking heads are saying. We’re not really listening to analysts. We’re really not listening to management when it comes to Quant. It’s a data-driven process. And the data is basically looking at a company’s metrics versus the sector.

So these aren’t even metrics that I’m embedding or Seeking Alpha is coming up with. We’re looking at historical data and the forward data that we look at. So when you see like revenue growth going forward or earnings per share rates going forward, we’re actually using consensus estimates from Wall Street analysts. So our model looks at historical numbers and it does look at forward numbers, but we’re looking at consensus numbers. So we’re basically taking what the average is of what analysts estimates are that are out there. So Amphastar and Twilio look really good.

Going to take us to our next stock, which we have added, which is Celestica. So Celestica has had a great year. The stock is up 77% in the year, but you could see after July, it really came off sharply, and we continue to really like this stock a lot.

The Valuation is a B-. Growth rate is in line with the sector. So when you look, you see mostly green. Even though the overall grade is C+, when you’re looking at revenue growth, it’s a B. It’s got a huge forward revenue growth rate versus the sector. And if we look at the EPS growth rate going forward, its EPS growth rate is 41% versus the sector at 7%.

What brings it down a little bit, and I should tell you when we use an algo, we look at the metrics, the metrics are not equally weighted in the algo. Some metrics have a higher weight than others. Some actually here have no weight at all.

One of the metrics that we do look at is leverage free cash flow. That one does have a higher weight. So that comes in at C+. So that’s sort of bringing that overall grade to C+. But actually, like when I look at the stock, I really like looking at the top line and the bottom line. So to me, it’s got really strong growth. So I really like the stock.

We take a look at analyst revisions. We could see that in the last 90 days, there have been nine analysts that have taken up their earnings estimates. So that means they have lifted their existing estimates higher. So nine analysts have taken their estimates higher and no analysts have taken it down. So to me, this is a really good story. The stock has pulled back from its July levels. So this is a stock that I would be focusing on.

Another stock that has been a huge winner over the last year, the stock is up 166%. That’s Abercrombie & Fitch. It’s been a great stock for us. This is a stock that we’ve had in our Alpha Picks portfolio. It’s given us a great return. But again, if you look to the July period, you could see the stock has come off sharply from those July highs, but the fundamentals remain intact.

If we’re looking at the valuation, this is in the consumer discretionary sector, and the industry is apparel retail. It currently ranks number three out of 37 stocks. So it ranks very high. And you can see outside of valuation, it’s straight A in terms of grades, Growth, Profitability, Momentum, Revisions.

So the valuation, even when you look at that, you have the price-to-book that brings it down. I’m not sure price-to-book is really that much of an influencer in terms of the apparel retail sector, but it is having an impact on the overall grade, which brings it to C-. But if you look at the conventional metrics, the forward P/E for the company is 13x versus the sector at 16x. On PEG, which you know, I really like a lot, it’s got an A+ there. So it’s a 0.04 versus the sector at 0.79. So on P/E, it looks great. On PEG, it looks great. And even EV to EBITDA and EV to EBIT, it looks great.

We take a look at the growth for Abercrombie & Fitch. This is almost like A+s across the board. The exception being a B+ for the forward revenue growth, which is at 11% versus the sector at 3.5%, I will take that any day having that forward revenue growth versus the sector. And then when we look at some of the bottom-line numbers, you’d see year-over-year, their earnings growth was 347%.

So Abercrombie is just like ripping the cover off the ball compared to the sector. Even the forward growth rate is at 246% versus the sector at 3.89%. So this is, again, another example of where I would take advantage of the stock coming off its July – really June was the peak for this. So it’s come off its June levels.

Next stock is Virco Manufacturing. This is in the industrials sector. This is an office service supply company. So you can see year-to-date, the stock is up about 12.3%. So that’s actually underperformed the market. Over the last year, it was up 95%. But again, we wrote our article actually in August 19. This stock was not included at that time because it was near a 52-week high. But since that point, it’s come off.

So you can see currently the stock is at $13.52. And back around August 23, it was $18.24. So it’s really come off sharply. Again, this is a company where it just has really, really strong fundamentals. The valuation is A+ for this stock. So if we’re looking at P/E. Its PE is 8.2x versus the sector at 24x. So it’s literally at a 66% discount in the sector.

On a PEG basis, it’s at a 69% discount, for the forward PEG. Last year’s PEG, TTM is trailing 12 months, so that’s history at this point. So I’m more concerned with the forward PEG, and that’s an A+, and that’s what I’m looking at here. But you’d see very strong valuation metrics for the company pretty much across the board.

We’re taking a look at growth. You can see the revenue growth looks very strong for the company, the EBITDA growth looks strong, and the forward EPS growth is just a monster number compared to the sector at 19 – almost 20% compared to the sector at 8.74%. So again, really strong fundamentals on this company. Just taking a look at the chart. You can see over the last year, it’s done well, but it has come off since August.

So for an industrial company, we would really advocate taking a look at it at this time. This is also a small-cap stock. I want to highlight that. The market cap on the stock is only $219 million. One of the things that I like about this stock being small cap, a lot of times – and if you look at small-cap stocks versus large cap over the last two years, small cap has not performed well.

But the place that you want to be when the market starts to really fully recover, going into normalized environment, as hopefully, we will be post the election, especially with interest rates going down, small-cap stocks do not do well when interest rates are going up.

Now that we’re going into an environment where interest rates are coming down, small caps should do well. But where this stock stands out as a small cap is in regards to its profitability. You normally don’t see really strong profit numbers from small companies like this, but this one has it in spades. So I feel really comfortable recommending a small-cap stock that has this kind of Profitability, especially as interest rates are coming down.

And lastly, that’s going to bring us to Toyota Motor Corp. We do say that the there is risk for its dividend here, but I want to point out this is an ADR. Obviously, many people know this is a company based in Japan. With ADRs, they tend to have their dividends come out on a semi-annual basis. And many foreign companies, their dividends don’t always come out at the same level.

So in the U.S., you’ll consistently find like every quarter, it’ll be $0.05, or every quarter, it’ll be $0.10, or every quarter, it’ll be $0.20. Many of the companies that have ADRs, there’s variation in the dividend. So that’s why you see this warning flag. I don’t think there’s really a risk of them cutting their dividend because of that. And you can see the consistency where their dividend has been high, the yield has been high, the growth is high.

I just want to warn people that you don’t have a quarterly dividend that’s as stable as you do with U.S. companies. But when we look for capital appreciation, we’re not even looking at dividends. We’re looking at these core Factor Grades, and that’s where we highlight a stock.

So this stock had done really well for us. You could see going back over a year, it was trading in September around $182. We put out an article really basically saying, go with Toyota or Tesla (TSLA). The article was spot on because Tesla went absolutely the other way that stock started to get crushed and Toyota started to appreciate going into March.

And then when the market started to pull back, we had a really great run for the market in January, February, March for the broader market, not for the MAG-6. The MAG-6 actually really started to come down in the first quarter and the broader market started to have a nice return. Toyota was having a really nice return. But when that rotation started, many of the auto stocks, especially Toyota, really started to take it on the nose.

So the stock has come off sharply. But this is why we like Toyota. Take a look at the valuation, growth, and profitability. So I’m going to take us to the Valuation. And you could see that versus the sector, its P/E is just under 8. So that’s the trailing P/E. The forward P/E is at 8x versus the sector at 18x. So Daniel, that’s a 55% discount to the sector in P/E.

DS: I was just pulling up a chart here between Toyota versus Tesla and you can do a direct comparison by adding the symbol right there between Toyota and Tesla, and it gives a nice visual of how these stocks were kind of correlated initially.

And then you saw a massive divergence, which you were talking about and then you see them start to come back together, right? It was the story you were exactly talking about.

SC: Yes. It’s sort of perfect timing. So, I tell you, when I wrote this article back then, I felt like one of the most hated guys writing a stock on an automotive company, but it really did pan out well. So we saw Toyota really start to take off. And as you could see, it sort of peaked.

We had a return, like in essence, almost up 37% versus Tesla, which fell about 30%. And then as soon as this like market rotation occurred and there was a return to the MAG-7 stocks, Tesla started to appreciate, and the market rotated out of everything else and focused, and I’m going to show you a chart that highlights how the MAG-7 had a huge run from basically like May through July, and Tesla participated in that.

So the market it was trading on sentiment and was not trading on fundamentals. So I’m going to go back to the fundamentals. We’re going to look at the Valuation, which you could see, it’s dirt cheap versus the sector. And then when we look at growth, take a look at the revenue growth last year for Toyota was 18% versus the sector at 1.9%. This year, the forward growth rate is not quite as high, but it’s still significantly higher versus the sector.

And then when we take a look at the bottom line, the EPS growth, look at the forward EPS growth, that’s 104% for Toyota versus the sector at 5.85%. So the earnings growth is just crushing it for this company, but obviously, the stock not acting that way.

So this is the year-to-date return for the Mag 7 versus well, we have Alpha Picks, our portfolio where we have two of our best ideas a month. It has significantly outperformed since inception going back two-and-a-half years ago, but here we’re taking a look at year-to-date.

So Alpha Picks is always a portfolio comprised of stocks that have very strong fundamentals. And you can see from January through to April, fundamentals were ruling the day. The market was getting away from like the Mag 7 hype. The market was starting to look for good valuation stories, good growth stories, and you could see the Mag 7 did okay. And then everything started to roll over when there was a sector rotation.

And once the sector rotation didn’t play out, but there was sort of a flight-to-safety, and investors tend to think of the Mag 7 as the safe stocks. Why? Because these are the seven largest stocks in the market, they have the strongest profitability, they have the most cash. So when we sort of hit this fear period of, wait, will interest rates be coming down? Wait. Is inflation going to be stickier for longer? Are we going to go into recession? What’s going on?

The market was going crazy during this period. Everything started to come down. And then there was that flight-to-safety. And look at how the Magnificent Seven did. Basically from the end of April to July, it just skyrocketed, okay? And this was not based on fundamentals. The fundamentals did not change for the Magnificent Seven.

In fact, the growth rates for many of the Mag 7 stocks, the forward growth rates actually started to come down. But those stocks went ballistic when the market was going to sort of that fear period. And we saw our Alpha Picks take a dive because people sell the stocks where they made money that have good fundamentals, and there’s a flight-to-safety. So utilities did well, Mag 7 did well, and that’s what happened.

And then in July, we sort of had another jolt, and that’s when the VIX hit that level of 60 for one day. But people began to realize, you know what? The Mag 7 stocks had done well, and we still had that volatility. The market was really focused on the growth numbers slowing down in the labor market, basically as a sign potentially there could be a recession.

So everything started to correct at that period. So from July through August, and then we wrote that article on August 19, and you could see the return that we had in those six stocks, four of the stocks had all of them had double-digit returns. So it was a great time for us to write that article. But the Alpha Picks portfolio really started to pick up again. And, in fact, Alpha Picks now year-to-date is up 38% versus the Mag 7 up 37%. The S&P 500 is up about 21%.

So my anticipation is, as we get through the election, we’re probably going to start to see the Mag 7 stocks pull back a bit. The broader market is going to start doing well, and investors are going to start focusing again on companies that have really good fundamentals.

One thing I want to highlight from this commenter when he read the article on August 19, he said one day later, he noticed the stocks were down. I have to tell you, you can’t buy these stocks expecting a return in one day.

When we recommend these stocks, they have a Strong Buy because they’re mispriced. That means that they’re typically undervalued, but it also means that they have strong growth and strong profitability. But when it’s mispriced, it means that the market isn’t paying the valuation for it that the stocks deserve. So they haven’t been fully discovered. And that’s why we recommend them as Strong Buys.

Do not expect to buy these stocks and have them up in one day.

Having said that, I would say, this was a pretty good turnaround, 38 days after the article, so as this individual highlighted, a number of the stocks were down one day later. Please don’t do that. But 38 days later, we can highlight our Sterling Infrastructure recommendation was up 30% since August 19. Our Trip.com was up 32%. Our Corporación América was up 12.2%. Carnival Corporation was up 20%.

The two stocks that we’re maintaining that we presented on today, Twilio and Amphastar, are only up moderately. They’re in single digits. The others are up double digits since August 19. Hence, that’s why we’re not recommending the stocks this time around, and we’ve introduced other stocks that are still beaten up that, we believe, have upward price potential.

The next question came, and this had to do with Carnival. It said, CCL has been running close to capacity and is bringing on new ships at a great expense. Many destinations are limiting the number of passengers and vessels in port at a time. I don’t see a lot of upside in revenue without price increases.

And the follow-up to this was it wasn’t obvious to the person why not recommend (RCL), which had been doing very well instead of Carnival? So that’s Royal Caribbean versus Carnival.

So I want to highlight the Valuation, the Quant Factor Grades. You could see Royal Caribbean is a bit expensive, okay? It’s got a D for its Valuation Grade versus Carnival, which is C+.

So that means that Carnival is actually a better value. And in terms of growth, Carnival is edging out Royal Caribbean as well. So it’s got a Growth Grade of A+ versus Carnival at A. Profitability is about the same. And then when you look at the EPS revisions, they’re both very, very strong, but Carnival having slightly more upward EPS revisions than Royal Caribbean.

But the point of the article, okay, at the time was to focus on beaten-up stocks. So you could see the year-to-date return on Royal Caribbean was up 41% and Carnival was only up 1%. So Carnival really, it’s got stronger fundamentals than Royal Caribbean, but the market hasn’t realized that valuation growth framework yet. Hence, the reason we were recommending the stock.

Now, if you look at the one-month return, you could see it’s about even. So Carnival is now starting to catch up to Royal Caribbean. And my anticipation is that Carnival will still continue to perform well. And as I said, since that article, August 19, only 38 days later, the stock was up 20%. So we didn’t feature it today because it’s up double digits, but it’s still a stock that we like.

Markets are moving constantly. And we try to tell people to ignore the big corrections, big rallies, ignore the talking heads on TV, ignore the fear mongers, and just stay focused on the stocks that have good data. But that changes every single day.

And a lot of times people will say to me, they’ll buy a stock and it’ll be a Strong Buy. And literally like a week later, it might drop down to Hold. They’re like, why would you recommend a stock that’s a Strong Buy today and a week later it goes to Hold? It’s not like we determine that. For each stock, it trades hundreds if not thousands of times a day. And each time that stock trades, it’s a new vote on the valuation framework for that company.

So the market is trading at a real-time basis. You can’t be an investor and think that things stay still. It’s like the ocean. It constantly changes and moves, okay, that’s the market. It constantly changes and moves. But what we do on Seeking Alpha is we identify the stocks that have great fundamentals, regardless of all the moves that are taking place. We zone in on the stocks that have good Growth, good Valuation, and that literally could change every single day.

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.