Two Perfect 10s
By Mon, Oct 26, 2020
There is no doubt we are in an investing environment riddled with grave uncertainties. Will Congress pass a stimulus bill, or not? Who will be our next President and how will his policies affect the economy? Will Covid-19 flare up again and force more lockdowns? Will there be a vaccine that is both safe and effective anytime soon?
These questions, along with others, remain unanswered as of this writing. And the unknown variables surrounding them have been making a wreck of the day-to-day tape of the market. Back in early September we saw the major market indexes fly to new all-time highs. Then, just as quickly, they fell to new six-week lows. Now, they are chopping around in the middle of that range, looking for direction.
It’s market conditions like these that force investors to become very, very selective. In a smooth-running bull market, you can throw a dart at the stock listings and chances are good you’ll come up with a winner. In a prolonged bear market, so-called safe havens such as utilities and consumer staples become the obvious choice and they, too, can yield consistent returns. But in a choppy tape like this, we must drill down into the details to find those pockets of genuine strength, strength that transcends the political and economic uncertainties of the day.
Fortunately for us, there is an easy way of doing that. I have created a market scan that sizes up all publicly listed companies for how they rank in 10 separate categories. Most of the marquee names we all know – companies like Facebook, Apple, Google, and Netflix – will rank high in seven or eight of these categories. But when we find a stock that rates highly in all 10, we know we’ve found a winner, both in season and out.
The categories that populate my scan include, among other things, technical strength, earnings and sales growth, analyst sentiment, valuations, insider activity, fund activity, and news sentiment. Less than 1% of the companies in my database hit high levels in all ten of these filters. Here are two of them for your consideration.
Brunswick Corporation (BC) – No, not the bowling-ball company. This Brunswick is a premium boat and boat-engine maker (Mercury, Sea Ray, and Boston Whaler are some of its brands). Brunswick is truly making waves with its recent sales numbers. At its last quarterly announcement at the end of July, the company beat estimates on both top and bottom lines, and raised its forecast for the upcoming year. Apparently, the pandemic summer was as good for boating as it was for RV sales, because the company hit $0.99 earnings per share in the second quarter, more than 130% above consensus, and projected another 31% above that for the third quarter, the results of which will be announced this Thursday. Brunswick also raised its dividend to $0.24 from $0.22. And, to top off an outstanding report, Brunswick earned an upgrade to “overweight” from JPMorgan.
Raymond James analyst Joseph Altobello, who has been awarded the coveted 5-star status on TipRanks.com for his accuracy in stock picking, is positive on the current environment for Brunswick. He writes, “Retail trends continued to be very strong in July and August amid unprecedented demand for boats…while demand has been strong among existing boaters as well.” Altobello is referring here to Brunswick’s inventory of boating peripherals – in addition to boats and engines Brunswick also makes boating hardware, seating, lighting, electronics, and more – which have been hit due to Covid-related supply chain slowdowns. This is forcing many boat owners to postpone upgrading their crafts. He suggests that this will make 2021 a stellar year for sales in the boating industry generally, and particularly for all those new Brunswick customers who bought boats this year.
The second company rating a perfect 10 right now is LPL Financial Holdings (LPLA), a brokerage platform and financial advising firm. I have turned to LPL for over 10 years now because they offer, in my opinion, the best financial research in the industry. When I want a solid read on the markets, I tune in to LPL’s daily broadcasts and am nearly always given high-probability direction.
LPLA shares trade at just 13.2 times earnings on a year-on-year earnings-per-share (EPS) growth of 36.4%. The company’s massive free cash flow (8.4 times earnings), its return on equity (49.6%), and its broad profit margins of 9.1% suggest a company that is well managed, conservative, and is successful at building its brand to ensure solid pricing power. No fewer than six firms have upgraded the shares this year, including Citi, Morgan Stanley, and Wells Fargo, all of whom have lifted price targets to 100 or more, suggesting a 20% move from current levels.
Technically, shares of LPL are in a perfect position here for a large breakout move. LPL has had trouble cracking through the $85 level, having knocked on that door no fewer than five times since rising off the March Covid-induced lows. But recent volume on the up days has far outpaced volume on the down days, suggesting that shares are under accumulation. Indeed, LPLA has seen its shares owned by fund managers increase by 38 funds over the past quarter, to 333 from 295, including a rise of 17 new hedge funds owning a position. It would seem this kind of support will easily enable LPLA to see the breakout over $85 it has long been hinting at.
Action to Take: Both BC and LPLA are prime additions to a well-diversified portfolio of midcap companies. I would be a buyer of BC up to a price of $67 and a seller at $90, and a buyer of LPLA up to a price of $86 and a seller at $110.
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About the Author
Dr. Thomas Carr (aka “Dr. Stoxx”) is the founder, CEO and Chief Market Strategist for Befriend the Trend Trading, LLC, which oversees the "Dr. Stoxx" brand of stock-picking newsletters (DrStoxx.com) and trader training resources. Dr. Carr has been active in the markets since 1996. Along the way he authored four bestselling books on the stock market that have been translated into Chinese, Korean, and Japanese.
