I have several new VBR buy signals to discuss today. Friday’s 2% upside action in the U.S. stock market generated interest in a couple of names. However, I thought I would interject my overall forecast for Wall Street’s direction took a decidedly bearish turn this week. You can read more about the reasons for my skittishness in the just posted “Developing Liquidity Crisis” article here. I suggest investors hold a fair amount of cash, remain well diversified, and/or employ some hedging through short selling and index put options to prepare for the strong possibility of another 10% to 15% of Wall Street downside in coming weeks/months.
I really don’t have much to report on the performance front for the VBR’s initial 11 picks made over the last three weeks. The biggest gainer so far is Fresh Del Monte Produce (FDP). A story was published after the close on Friday that a takeover offer may be coming from partner I Squared Capital. Using the +4% advance in late-night trading, this pick is up about +15% over several weeks. The buyout rumor also explains the oversized volume interest in FDP.
As a group, the 11 VBR picks are averaging total return performance very near the flattish returns from the Russell 2000 small-cap and S&P 500 large-cap indexes. For a review of what’s possible on the upside and downside after VBR signals, please read last week’s article linked here.
New Buy Signals
Incyte Corp. (INCY) is a fast-growing biotechnology company with a number of pharmaceutical products on the market. A conservative balance sheet includes $2.5 billion in cash ($10 per share) and $4 billion in tangible book value ($16 per share), with few liabilities. Earnings are projected to keep growing around 30% annually, pictured below.
Subtracting out the significant cash stash, INCY’s underlying earnings yield is approaching 5%. Essentially, this selection represents a classic defensive position during recessions, with growth-at-a-reasonable-price [GARP] characteristics. Any acceleration in sales or new product introductions could lead to robust gains in the stock quote over the next year.
I wrote about Bassett Furniture (BSET) earlier in the week here. The company is a defensive choice with almost half of the stock price backed by cash. Extra dividends and share buybacks in 2022 may continue for years. The operating business is incredibly cheap when you adjust for cash assets, trading closer to an EV to Earnings (final, after-tax) number of 4x and EBITDA under 3x. If a recession does not totally drag down home furnishing industry sales into 2023, I project investor upside of 50% to 90% is possible in BSET.
Seeking Alpha computers agree BSET is a terrific choice, based on earnings trends and trading momentum. SA’s Quant Ranking for Bassett is close to a Top 1% pick currently, out of a universe of 4,600 equites.
Cross Country Healthcare
If nursing and doctor shortages are the new normal from COVID-19 burnout and stress, Cross Country Healthcare (CCRN) could have a bright future. The company is based in Florida and became quite profitable during 2020. This stock is benefiting as a staffing assignment company for hospitals and other healthcare centers during the nationwide nursing shortfall to meet exaggerated demand. Nurses and physicians have been quitting in large numbers, which should work in favor of CCRN as trained labor supply could take years to rebuild. The earnings and sales outlook is pictured below, with a peak anticipated in 2022. Such a forecast may or may not prove accurate if a new wave of coronavirus variant strikes this fall and winter. The company holds a strong balance sheet with more cash and receivables than total liabilities.
Despite considerable stock quote gains over the last couple of months, projecting a P/E of 15x next year’s EPS would still leave potential price upside of 50%+, sooner or later into 2023. The original VBR signal was on Monday’s close at $24.51. Price at yesterday’s high was already up +10%.
Green Brick Partners
It sounds counterintuitive to invest in a homebuilder at a peak in the housing market. More than likely, new homes will not be as profitable to build, considering the effect on demand as mortgage rates have almost doubled in 18 months flat. However, sound management and lower commodity costs in a recession will still allow for decent income generation in the right markets. Green Brick Partners (GRBK) is a major builder in Florida, Atlanta, and Dallas, areas of the country witnessing high home demand during 2021-22. The current equity price of $23 and change is close to its tangible book value of $17, and well off its December $32 peak. The stock is valued at 5x trailing EPS and 4x EBITDA, with income likely peaking this year if a recession is next. The good news is a long-term demographic trend of new home shortages in America should support the business. Green Brick has grown rapidly over the years without utilizing much debt, another big plus in my book. David Einhorn’s Greenlight Capital owned 34% of outstanding shares at last report.
Seeking Alpha computers agree Green Brick is an outstanding choice currently. SA’s Quant Ranking for GRBK is also categorized as a Top 1% pick today, just like Bassett Furniture.
I am very cautious about the U.S. equity market’s direction in the weeks ahead. Nevertheless, I am confident my VBR picks will keep pace or outperform as a group vs. the S&P 500 and Russell 2000 indexes over the coming months. If you are more bullish than I am, or can stomach immediate losses of 15% or 20%, don’t be shy about considering my VBR sort winners.
I suggest readers make an effort to do further research into any of the Volume Breakout Report selections that appeal to you, a function of your risk appetite or sector exposure needs in portfolio construction. Please understand small-cap picks should be a limited portion of portfolio design. Holding a diversified number of stocks is the prudent risk-adjusted way to play them. Volatile price swings are part of the investing process for smaller companies on Wall Street. Please consider using preplaced stop-loss sell orders to reduce downside potential in individual names. Depending on your risk tolerance, 10% to 30% stop levels are recommended.
VBR stocks are selected using a specific set of formulas designed around positive momentum characteristics, crossed with high-volume days inside short-term price uptrends. My proprietary formulas review the relative health of as many as 15 different technical indicators, computer-sorted daily from a universe of thousands of equities.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.