Five Hot Stocks in a Stone-Cold Market
How’d you like to be up 62% in the last month?
Dumb question, I know.
Any one of us would take 62% anytime, but especially when most stocks are getting tossed around in notorious August volatility.
That 62% is the average gain of five stocks topping the list of a simple stock-searching “screen” I ran.
Here’s what I looked for.
I focused on stocks with market capitalizations over $2 billion, average daily volume over 500,000 shares, and options available. (That eliminates stocks that are too thinly traded and too risky to consider.)
Those five big winners – out of 1,374 total stocks – generated the equivalent of six years of average market returns. And they did so during a stretch where the broad market is down more than 2%.
Talk about hot stocks in a cold market.
Look, I like action – momentum – as much as the next investor. And with good reason. It’s what you might call “a law of investing physics”: a stock in motion tends to stay in motion.
That’s why a stock’s technicals – which measure momentum and trading strength – are one of the most important elements of the Quantum Score my system assigns to more than 6,000 stocks each day.
The Quantum Score is a simple and quite effective snapshot of whether a stock is on the road to higher prices or not.
But it is a snapshot, not the whole landscape.
Not a destination, but a starting point.
It’s incredibly valuable starting point because it eliminates more noise than even the best ear plugs at a Taylor Swift concert. I can focus my deep-dive analysis on maybe 3% of stocks to hone in on the best of the best.
That’s when I turn to the depth in my Quantum Edge system that processes more than one million data points on more than 6,000 stocks every day.
Let’s see what this deeper analysis tells us about the hottest stocks in the market right now. I think you’ll notice a theme that will save you some heartache.
United States Cellular (USM)
UScellular, a wireless telecommunications provider, has more than doubled in the last month. That includes a 91% moonshot on Aug. 4 that brought USM to its highest prices in two years. Interestingly, it is still flat over the last five years.
And what caused that dramatic spike this month?
The company’s somewhat nebulous statement that its parent, Telephone and Data Systems (TDS), is in “a process to explore a range of strategic alternatives for UScellular.”
That’s pretty hard to quantify on its own, so let’s look at the Quantum Edge data:
- Quantum Score: 70.7. Okay, I’m listening.
- Technical Score: 88.2. Very strong, reflecting the recent surge.
- Fundamental Score: 45.8. Okay, I’m out.
Earnings have shrunk over the last three years.
Debt is way too high, at 93% of equity – almost the entire company is leveraged.
And after the irrational pop, valuation is now through the roof, with the stock trading at 126.2 expected earnings. It doesn’t have a trailing PE because it has lost money two of the last four quarters.
I can also tell you that my system has detected four signals of unusually heavy buying since the Aug. 4 announcement.
But context is important here: Shares are only 27.4% owned by institutions. That’s not horrible, but it does mean those four signals may not be just the smart money but folks hopping on based solely on price movement.
Buying now is “buy and hope” that whatever strategic alternatives are explored pan out, and soon. That’s too squishy for my tastes, especially with the volatility producing much better buying opportunities in much stronger stocks.
Reata Pharmaceuticals (RETA)
Reata Pharmaceuticals soared 60% in the last month for one simple reason – it’s being acquired by biotech giant Biogen (BIIB). And Biogen is paying that much more for it.
Reata recently received approval for the first-ever treatment of a rare genetic disorder called Friedreich’s ataxia, and Biogen is banking on growth.
The deal won’t close until the fourth quarter, so my system still pulls and analyzes RETA data. And, well, I’m glad Biogen bought it, because I wouldn’t have.
- Quantum Score: 62.1. Not great but not horrible either.
- Technical Score: 88.2. Very strong, reflecting the recent surge.
- Fundamental Score: 25.0. Yes, out of 100. Yikes.
Earnings and sales just weren’t growing, which is not uncommon for an early-stage pharmaceutical company that just had its first product approved.
Anyone holding this stock was probably hoping for a buyout. They happened to pick the right lottery numbers this time, but that won’t happen very often.
Upwork (UPWK)
By now, you’ll see the theme starting to emerge.
Upwork essentially connects freelancers with businesses that might want to hire them. The stock jumped 40% on Aug. 3 after earnings beat expectations, which included making 10 cents a share when expectations were for breakeven.
Management also raised guidance and talked about its new “generative AI innovations.” I’m sure that didn’t hurt in the current AI mania.
UPWK rates better than the first two stocks, but it still doesn’t rate a buy:
- Quantum Score: 67.2. Good.
- Technical Score: 76.5, mostly because of the recent jump.
- Fundamental Score: 54.2. Middle of the road.
The fundamentals need some sprucing up. Profit margins need to come up, and debt needs to come down. It’s also right on the line of small-cap versus mid-cap, with a market cap of $1.9 billion.
Here’s a peek at some of the data:
UPWK is by no means a disaster and may turn into a buy in the future. For now, it doesn’t have a high enough probability of making good money for me to buy it.
Capri Holdings (CPRI)
This company name isn’t as familiar to us as its brands – Michael Kors, Versace, and Jimmy Choo. It’s clearly a luxury apparel and footwear company that operates around the world.
And why is it up 44% in the last month?
It, too, got bought. Tapestry (TPR), the parent company of Coach, announced it’s shelling out $8.5 billion in cash to buy Capri. The $57-per-share offer was nearly 60% above CPRI’s average price over the 30 days prior.
And it, too, was not a buy on its own given its ratings:
- Quantum Score: 58.6. Meh.
- Technical Score: 61.7. Meh.
- Fundamental Score: 54.2. Not good enough.
CPRI was down 40% this year before Tapestry announced the acquisition. So, it clearly was not a stock worth owning if you’re investing based on probabilities and not luck.
Applovin (APP)
By now, you know the pattern.
Applovin enjoyed a one-day pop after posting an unexpected profit in the second quarter, beating sales forecasts, and raising guidance.
It’s an interesting business – a software platform for app developers to help them market their apps and make money.
It’s just not fundamentally strong enough to feel confident in further upside.
- Quantum Score: 72.4. Very good on its own.
- Technical Score: 94.2. That’s actually too hot, and inflating the Quantum Score.
- Fundamental Score: 41.7. Ouch.
This is a stock to watch in the future. APP went public in 2021, and it lost 52 cents a share last year. Expectations are for profitability this year with continued solid growth in the coming years.
I’m all about probability – that 70% likelihood of making money. And right now, some of the data tells me the stock isn’t to that level yet.
Profit margins are still negative, though that could change in the near future. And debt is extremely high at nearly three times the value of the company.
I wouldn’t buy it now, but I will continue monitoring the company and the data, and I could see APP becoming a buy and rating strong enough that risk is low enough to be acceptable.
Buy These Stocks Instead
These five stocks have two things in common:
- They had unexpected surprises that shot shares higher.
- They don’t yet have all the necessary ingredients that make further upside likely enough to buy them.
I like technical strength, and it factors prominently in my Quantum Edge system. But relying solely on technical strength will lower your win rate significantly.
Focus instead on the companies with the ingredients to give you that high win rate:
- Exceptional fundamentals
- Strong technicals and momentum
- Big Money pouring in
You’re more likely to win… and win big. Especially with a potentially explosive fourth quarter on the way.
Talk soon,
Editor,
Jason Bodner’s Power Trends