Beware of These Big Gainers – At Least Most of Them
It’s always interesting and fun to look back at the recently concluded quarter to see which stocks really killed it.
To be honest, the quarter’s big winners are often stocks I’ve seen multiple times in my quant system’s screens and analysis.
Sometimes, though, I scratch my head.
That’s the case as I look at the first quarter’s biggest gainers.
It was a fantastic quarter overall, with the S&P 500 up 10%… and our Quantum Edge Pro portfolio easily beat that with a phenomenal 15.8% surge.
When the broad market rallies like it did in the quarter – and even more going back to last November – “junk” stocks sometimes lead the way. That term is an oversimplification, but the idea is that fundamentally inferior stocks outperform as investors get more speculative – and perhaps overconfident – in boom times.
And that’s where mistakes get made.
I screened for the top performers among stocks with a $2 billion market capitalization or more, average daily volume of 500,000 shares or more, and with options available on them. That does a pretty good job of cleaning out the thinly traded, low-valued stocks that are foolish to even consider trading.
And guess what?
Four of the five biggest winners have weak fundamentals, which makes future gains much less certain – and even puts those first-quarter gains in jeopardy.
Let’s run these stocks through my Quantum Edge system so you can see what I’m talking about.
1. Viking Therapeutics (VKTX): 327% Gains
Viking Therapeutics (VKTX) is a clinical-stage biopharmaceutical company – which means it does not have any approved products on the market.
In other words, it doesn’t generate sales, and it isn’t profitable.
Not surprisingly, that results in a poor Fundamental Score of 37.5. VKTX’s Quantum Score at 56.9 isn’t horrible, though it is well below my preferred buy zone between 70 and 85. But any respectability comes from the solid Technical Score of 70.6, which is the result of the first quarter surge.
Source: TradeSmith Finance and MAPsignals.com
That came on positive news from clinical trials of a potential obesity drug that showed faster weight loss than Wegovy and Zepbound.
The stock shot up 121%… in one day!
And it’s down nearly 20% from its high.
That’s the good and the bad of speculative stocks. You have to be ready for wild and unpredictable swings, some of which will be euphoric and some of which will be painful.
Most of all, you need to be prepared for the possibility that the ultimate outcome may not be what you’re hoping for. According to the National Library of Medicine, 90% of drugs in clinical development never make it to market.
Viking’s new treatment may be approved and become a blockbuster, but it may not. And even if it does, there’s a long road still ahead.
2. Super Micro Computer (SMCI): 247% Gains
Now we’re talking.
I’ve mentioned Super Micro Computer (SMCI) here in Power Trends before because I recommended it to my Quantum Edge Pro readers last fall. We made a lot of money in it during the quarter.
This company and stock are still firing on all cylinders, with a great Quantum Score of 81 and the fundamental and technical ratings equally appealing.
Source: TradeSmith Finance and MAPsignals.com
The company provides high-performance and high-efficiency servers, server management software, and storage for some of the hottest growth trends in tech. It is benefitting from the proliferation of artificial intelligence as its new servers are designed for A.I. applications.
The data points to higher prices in the future, so this is one top performer worth holding on to or perhaps banking partial profits. That’s what we did in Quantum Edge Pro, and given the right opportunity, we will reestablish a full position.
3. Avidity Biosciences (RNA): 192% Gains
Avidity Biosciences (RNA) is another clinical-stage company focusing on a new class of RNA therapeutics – hence the ticker symbol. RNA is ribonucleic acid, which along with DNA constitute our genes.
RNA’s lead candidate is a treatment for myotonic dystrophy type 1 (DM1). And while early data has been positive, the potential therapy has yet to begin the final phase (Phase 3) of clinical trials. It’s expected to this year, which is one reason the stock has been on the move.
Source: TradeSmith Finance and MAPsignals.com
The Quantum Score of 67.2 is just below my target buy zone of 70 or higher. My concern here is a familiar one: That strong score is driven almost entirely by price momentum, which isn’t always sustainable – especially when the fundamentals aren’t there to support it.
Here again, we have a stock on the move as investors try to get in early hoping that this will be a big year for the company. And it might be. But knowing how uncertain clinical trials and government approvals can be, that hope isn’t solid enough for me – at least so far.
4. Vera Therapeutics (VERA): 175% Gains
This is starting to get familiar.
Vera Therapeutics (VERA) is yet another clinical-stage biotech company – so no products on the market and, therefore, no sales or earnings growth to speak of.
Vera’s 51.7 Quantum Score pretty much takes it off my list of potential stocks to begin with, but the extremely low 25.0 Fundamental Score is a major red flag no matter how good the clinical news might be.
Source: TradeSmith Finance and MAPsignals.com
Shares have bumped on the appointment of two new executives and more so on a buy rating from Cantor Fitzgerald analyst Pete Stavropoulos. He joined Cantor after I had left, so I don’t know him, but I’m sure he’s very smart.
He believes Vera’s potential new drug – Atacicept, for autoimmune disorders – has a good chance of being approved one day. The company is currently recruiting patients for a Phase 3 trial, the final phase to determine safety and efficacy before submitting for FDA approval.
I don’t know whether Atacicept will be approved, and I don’t even know how to measure the probability that it will be or won’t be. And therein lies the problem. It doesn’t give me the high probability of success that I look for – typically around 70% based on my system’s history.
I’d rather invest my money elsewhere now and monitor the progress of Vera (and all of these companies), knowing that if things pan out, there will still be plenty of money to be made.
5. MicroStrategy (MSTR): 159%
You might be asking…
“Isn’t that the bitcoin company?”
Yep.
MicroStrategy (MSTR) is technically a software and consulting company, but co-founder Michael Saylor jumped onto the bitcoin bandwagon big time, and the company has been buying bitcoin for years and now sits on $14 billion of the cryptocurrency granddaddy.
Bitcoin has rallied 140% the last six months, bringing MSTR with it.
Source: TradeSmith Finance and MAPsignals.com
You can see how the technicals – with an almost overheated 85.3 rating – are the reason behind the respectable 63.8 Quantum Score.
The fundamentals are a different story. Earnings and sales are shrinking instead of growing – revenue is down eight of the last nine years. And the range of earnings estimates for the current fiscal year is downright frightening – from a loss of $1.64 per share to a gain of $0.50 per share.
That screams uncertainty, which is not how I want to invest my money.
And yes, MSTR will likely move with bitcoin prices. While I see value in the blockchain technology that secures cryptocurrencies, I am not yet comfortable investing in them.
A lot of smart people do, but cryptos are too mysterious and unquantifiable for a quantitative analyst like me. That may change some day, but for now I’m sticking with the highest-rated stocks – those with superior fundamentals, strong technicals, and lots of Big Money flowing in.
Stocks like SMCI that helped us outperform in the first quarter… and have a much higher likelihood of producing more and potentially bigger gains in the future.
Talk soon,
Jason Bodner
Editor, Jason Bodner’s Power Trends