2023-08-24 06:30:00 ET
Summary
- Foot Locker and Peloton reported earnings this week, and the shoe dropped for both - a warning showcased by our quant ratings for months.
- Deemed among the biggest stock losers Wednesday, Foot Locker fell more than 30%, and Peloton -26%, as revenue guidance fell well below consensus.
- The Quant Rating System has a track record of picking winners and identifying losers.
- This article will highlight how to spot stocks at risk of performing poorly to help investors minimize risk and maximize portfolio returns.
Warning: Stocks At Risk of Performing Poorly
Warning Banner (SA Premium)
Peloton Interactive, Inc. ( PTON ) has been spiraling for some time, having fallen from grace during its pandemic peaks as a COVID darling to a quant sell-rated stock trading under $6 per share. Similarly, Foot Locker, Inc. ( FL ) is getting kicked in the butt, plummeting 30% on guidance cuts and dividend suspension. With a softening of trends and our warning signals that showcased each of these stocks at high risk of performing poorly, we have the tools to help investors avoid stocks with poor fundamentals. In addition to our Quant Strong Buy recommendations significantly outperforming the S&P 500, for 2023, our Quant Sell Rated Stocks are up 1.64% vs. the S&P 500 15.82%. Quant Sell stocks significantly underperform the benchmark and offer sell warnings based on a systematic quantitative model. As evidenced in the chart below, our system works.
Quant Sell stocks are significantly underperforming the S&P 500
Quantitative investing is helping some investors beat the market. Using algorithms, a tremendous quant team, and massive amounts of data, as showcased above, the Strong Buy recommendations are beating the S&P 500 Total Returns. While some investors are willing to risk and bet on bearish stocks and a price drop, screening for potential duds in a portfolio can help determine losers. If you already have a portfolio with a financial institution or brokerage, simply upload it here and evaluate your picks. Stocks that underperform the S&P 500 are dead money, at risk of losing more. It's key to look at a stock’s fundamentals, which we snapshot for investors as Factor Grades, which rate investment characteristics on a sector-relative basis from A+ to ‘F.’
Foot Locker & Peloton Crash: Why Quant Investing Works
Factor Grades offer a snapshot of stocks with excellent potential versus those with poor potential. Strong factor grades, highlighted below in green, indicate fundamentally sound stock characteristics compared to the sector. Conversely, average (‘C’ rated) to poor factor grades show less-than-optimal metrics in orange to downright dismal grades in red.
Strong Factor Grades vs. Poor Factor Grades
Strong Factor Grades vs. Poor Factor Grades (SA Premium)
While quant investing, which uses historical data, is not a foolproof predictor of the future and does not account for macroeconomics and geopolitical factors, quant analysis, aka ‘quantamental analysis,’ is a technique that has proven advantageous, whether an investor is bullish or bearish. Using artificial intelligence ((AI)) to compile historical data and factor-based rankings, Quant offers better risk management and removes human error and emotion to locate Top-Rated Stocks . We can analyze thousands of securities simultaneously in a fast and focused way, offering directional buy, hold, or sell recommendations. Seeking Alpha Quant uses an algorithm to pick stocks based on five popular investment characteristics - Valuation, Growth, Profitability, Momentum, and EPS Revisions. Investors can instantly identify the strength or weakness of each metric compared to the sector based on grades from A+ to F.
Why did Foot Locker and Peloton crash?
On the back of their weak earnings, both stocks have characteristics typically associated with poor future stock performance. Down more than 50% over the last year, PTON and FL possess negative EPS revisions and declining growth when compared to stocks in the Consumer Discretionary Sector. While Foot Locker’s Return on Total Assets ((TTM)) is 3.21%, a 13% difference from its sector peers, the same metric for Peloton is -75.43% and receives an ‘F’ grade.
Peloton Stock Profitability Grades (SA Premium)
In addition to poor profitability, Peloton reported worse-than-expected Q4 2023. Despite being in line with top-line expectations and reporting $642M in revenue, Peloton took a $241M net loss, compared to its $1.26B loss for the same quarter last year. With fewer subscribers to end the fiscal quarter and poor guidance for the remainder of the year, it's no surprise to see the challenges mount.
Foot Locker also got kicked in the butt! Second-quarter EPS of $0.04 missed by $0.01 and revenue of $1.86B missed by nearly 10%. Management cited difficulties converting store traffic, as customers remained cautious with discretionary spending. Although Foot Locker is attractive from a valuation standpoint, with a trailing P/E ratio ((TTM)) of more than a 55% difference to the sector, its all-important forward PEG ratio of 5.31x tied to growth is nearly a 270% premium compared to the sector median 1.44x. Unattractive on valuation, Peloton receives an ‘F.’ Not only is the stock trading at a premium, but one of the most important of our five core factors concerning price predictability is momentum.
Momentum is a warning
Peloton’s Momentum Factor is a D, and Foot Locker’s is a D-, indicating how each stock is underperforming the sector. Over the last 52 weeks, PTON is -39% and FL is -37%; both are down more than 45% over the last six months compared to the sector, only down 6%, substantiating our risk warnings. I’m highlighting the “momentum effect” by three independent sources, BlackRock , The Case for Momentum Investing , and the Journal of Finance , that momentum is a crucial factor.
Foot Locker Stock & Peloton Stock Momentum Grades (SA Premium)
In addition to poor momentum, each of the stocks has several Wall Street analysts revising earnings down. In the case of Foot Locker, 18 analysts revised estimates down in the last 90 days, with zero upward revisions, resulting in a D- Revisions Grade . Although Peloton’s Revisions grade is a ‘C,’ four analysts revised down compared to one upward revision, indicating analyst sentiment towards these stocks.
Foot Locker Stock & Peloton Stock Revisions Grades (SA Premium)
Although many investors want fast-growing stocks with substantial returns, it is vital to consider identifying weak stocks as poor performers for an opportunity to “make an impression,” as the once Footlocker ad campaign stated. Through quant investing, you remove the emotion and can heed the warnings of stocks at risk of performing poorly to avoid the shoe drop.
Conclusion: Quantitative investing is helping investors beat the market
To invest successfully, consider using tools that identify stocks attractive on the collective investment characteristics of Valuation, Growth, Profitability, Earnings Revisions, and Momentum relative to their peers - our Factor Grades. Not only does our quant model identify stocks that look good, but we also highlight those that look poor on these core investment factors and sometimes provide a warning banner. If an investor cannot measure the characteristics of a security, there’s a greater risk and potential for assets to underperform.
The markets have been volatile, and our goal with quant is to help you instantly characterize stocks with solid fundamentals and strong investment metrics. We have dozens of Top Stocks for you to choose from with great fundamentals. Test out tools to evaluate the stocks in your portfolio. Check out their Health Score , and start putting our Quant system to work for you. If you're seeking a limited number of monthly ideas - curated from a list of Top Quant stocks - consider exploring Alpha Picks .
For further details see:
Shares Plunge On 2 Quant Sell-Rated Stocks: Foot Locker And Peloton