The Top 3 Stocks in the Top ETF
You’re probably seeing ETFs all over the news today.
That’s because the first-ever bitcoin exchange-traded funds started trading today after being approved yesterday by the U.S. Securities and Exchange Commission.
For real. Not the “oops our account was hacked” approval that came out on X (Twitter) on Tuesday.
This is a big deal in the crypto world. Investors can now hold bitcoin through existing financial instruments trading on regulated stock exchanges.
I’m not a crypto guy – at least not yet – though I do see potential in the blockchain technology that underpins cryptocurrencies.
I’m generally not an ETF guy either. There are exceptions, of course, but you have to own all of the stocks in an ETF – including the laggards. It’s better to own just the best stocks.
I will say that ETFs are great proxies of what’s going on in the market and certain sectors. That’s why I track a bunch of them closely.
ETFs help me identify areas of strength in the market and where Big Money is flowing. They can also be great sources of investing ideas. Drilling down into the strongest ETFs, we can pinpoint the top stocks in the funds – and leave the slackers behind.
Let’s do that right now with the top-ranked fund in my Quantum Edge system: iShares MSCI USA Momentum Factor ETF (MTUM).
First of all, it’s interesting that a “momentum” ETF leads the market right now. That shows you how powerful the end-of-year rally was. That idea scares a lot of investors who think they’ll buy at the highs, but my research and experience show conclusively that new highs tend to lead to more new highs.
As the name states, MTUM focuses on large- and mid-cap stocks showing price momentum. My system gives this ETF a Quantum Score of 69.5, which is slightly better than the second-ranked fund, iShares U.S. Home Construction ETF (ITB). That’s an equally interesting number two, don’t you think?
Now let’s look under the hood to see what stocks are driving with the best-in-market strength.
Broadcom Inc. (AVGO)
Sources: MAPsignals.com and TradeSmith Finance
Broadcom is MTUM’s biggest holding with a 5.4% weighting. With a Quantum Score of 72.4, AVGO sits in the sweet spot buy zone between 70 and 85.
You’ve probably heard of Broadcom. It’s a global leader in a sector I’ve been talking a lot about lately: semiconductors, or “semis.” AVGO designs, develops, and supplies a range of software solutions for semiconductors and infrastructure.
We are in a new growth revolution in semiconductors, and AVGO is up 27% in the last three months. (To capitalize on this trend, I recently recommended another semiconductor stock in TradeSmith Investment Report that has soared 35% in the last three months.)
As you can see above, AVGO’s fundamentals and technicals are strong (also rating in the 70s). And the other area I focus on, Big Money inflows, is also positive. My system has picked up eight buy signals (green bars below) in the last 90 days.
Source: Mapsignals.com
Meta Platforms (META)
Sources: MAPsignals.com and TradeSmith Finance
Meta probably doesn’t need an introduction – it’s the company formally known as Facebook. And it now also owns and operates Instagram, Threads, WhatsApp, and more.
META makes up 5.1% of MTUM, the second-largest holding. And you can see why with a Quantum Score of 75.9.
META’s Technical Score of 85.3 is impressive, thanks to the stock’s steady march higher over the last 12 months – to the tune of 176%. Big Money hasn’t been unusually active in the stock over the last five months, but my system did spot unusual buying in META just yesterday.
I’m not blown away by the weaker Fundamental Score of 62.5. That’s not bad. It’s just that there are fundamentally stronger stocks out there. Sales growth is okay. Earnings are expected to grow just 2.4% in the current fiscal year. And the stock isn’t cheap after its run over the last year.
But momentum remains strong, and META continues to rate in the buy zone.
Eli Lilly and Company (LLY)
Sources: MAPsignals.com and TradeSmith Finance
Eli Lilly and Company (LLY) is another company you’re probably familiar with. It’s a giant American pharmaceutical company that uses biotechnology to advance new medical discoveries – very important stuff.
LLY is valued at $605 billion, which means all three of MTUM’s biggest holdings sport market caps above $500 billion. Momentum is with the big boys right now. (My research into election years indicates that will change further into 2024.)
LLY comprises 5.1% of MTUM, putting it on equal footing with META. You may have noticed that Lilly has the highest Quantum Score of these three stocks at 79.3. The fundamentals aren’t super impressive with a 62.5 rating, but the technicals are blistering at 91.2.
This brings up an interesting phenomenon in my Quantum Edge system. The scores are not like a test in school. Yes, 100 is the best you can get, and it seems like that’s what you would want to see. But it’s not.
When the Technical Score especially gets above 90, the stock is either already overheated or very close to becoming overheated. When the technicals are nearly as good as they can possibly be, a pullback becomes more likely.
That’s one reason I love to buy stocks with Quantum Scores between 70 and 85. I don’t mind buying into strength, but I don’t want to get burned jumping into something that’s too hot to handle. I’ll take all the fundamental strength I can get, but the technicals need to be analyzed a little differently. That’s why I break them both out, and it’s why I follow what Big Money is doing in every stock.
Now is the time to own top-ranked stocks that combine fundamental and technical strength with Big Money pouring in. I’ve mentioned the record amounts of cash on the sidelines before, and this cash bubble is about to pop. This money flooding into stocks will be one of the primary catalysts in 2024.
ETFs are one way to benefit, but you can do better building your own basket of the top-ranked stocks in the market and leaving the laggards out.
Talk soon,
Jason Bodner
Editor, Jason Bodner’s Power Trends