Summary
- Our guest this week is Seeking Alpha's own Head of Quantitative Strategies, Steven Cress.
- Steven Cress shares a few of his top stock picks for this year.
- We dive deeper into how he approaches choosing the stocks for this list utilizing the Seeking Alpha Quant System.
Editor's Note: This is the transcript version of the previously recorded show. Due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the podcast embedded above or on the go via Apple Podcasts or Spotify . Click here to read the full "Top 10 Stocks For 2023" article. Click here to follow Steven Cress on Seeking Alpha. |
Transcript
Daniel Snyder: Welcome back to Investing Experts Podcast. I'm your host, Daniel Snyder. In this episode, our very own Steven Cress, Head of Quantitative Strategy at Seeking Alpha, joins us to share a few of his top stock picks for this year.
As you'll hear more about in this episode, overall, his Top 10 stocks for 2022 outperformed the market. So we dive in a little bit deeper of how he approaches choosing the stocks for this list, utilizing the Seeking Alpha Quant System. And I should mention, we open the black box and dive into the strategy behind the system as well.
Just a reminder, anything you hear on this podcast should not be considered investment advice. At times myself or the guest, my own positions and the securities mentioned, but this is for entertainment purposes only and you should seek advice from a licensed professional before investing.
If you enjoy this episode, please do us a favor and leave a rating or review on your favorite podcasting app.
Now, right. What a treat! Steve Cress, the man, the myth, the legend here, joining us today on Investing Experts Podcast. Steve, thanks for joining us.
Steven Cress: Thank you for having me.
Daniel Snyder: So, I want to give you the opportunity, do you have a 1, 2, 3-minute pitch of just what's your background, how you got started in quantitative finance and investing, and just give background for the people who don't know who you are.
Steven Cress: Yeah, sure. So I've been in the world of finance for over 30 years, way back when I started as an equity research analyst for what is now, Wells Fargo ( WFC ). The area that I covered was closed-end funds, which was comprised of actual equity funds and country funds and fixed income funds, and it was a great learning experience to get into the industry.
The bulk of my career was 14 years at Morgan Stanley ( MS ), where I worked in both New York and in London. And for Morgan Stanley, I ran prop trading desk in quantitative strategies. Incidentally, more incidentally is where I originally met David Jackson, who is the Founder and CEO of Seeking Alpha. He worked at Morgan Stanley as a telecom equipment analyst in New York, and we crossed over initially at that point.
Obviously, that's a great segue to how we reconnected a few years ago, I had founded a hedge fund in London. And simultaneously, I also founded a fintech company, CressCap Investment Research. And it was during that period, that David and I crossed over and the fintech company that I had created was akin to a robo analyst, where a user could input any stock name in the world and get an instantaneous equity research report with a fresh daily recommendation as well as the present interpretation, the valuation framework. Both the hedge fund and the fintech company utilize the same [indiscernible].
Eventually, the fintech entity became a far more interesting company to run, and I decided to do that all the time. When the technology was up and running a couple of years ago, we were actually charging $5,000 per subscription. In essence, that those quantitative metrics that we score, right, you get that right now on Seeking Alpha. And really, honestly, a much more user-friendly experience.
About two years into running the fintech company, reconnected with David. When we looked at each of those platform and he looked at CressCap Investment Research's platform, and I looked at Seeking Alpha’s platform, we both knew what the way that we had to merge these companies. The result is what we now see today on Seeking Alpha is an amazing platform of news, qualitative research through Crowdsourcing, and state-of-the-art quantitative analysis. But again, it's still refreshed every single day.
Notably, the subscription is no longer $5,000, I think, the current subscription to Seeking Alpha is now $239 a year, but there may even be a sale going on right now, so it could actually be half that amount. What else can I share with you, Daniel?
Daniel Snyder: For the people that may not know what a Quant System is, and let's kind of explore that real quickly. What is the basics of a Quant System and what makes it so powerful?
Steven Cress: Okay. Look, I'll definitely start with the latter part of that. What makes it so powerful is when it works, the performance is great. And we do have a model that works really well at Seeking Alpha. Just by background, the quant strategy is performance as it took all our strong buys over a very difficult year. Last year, we outperformed the S&P 500 by almost 15% in 2022.
If you're aware, we also rate dividends and maybe 9% of dividend cuts could have been averted you own a stock with a dividend safety grade of A+ to A-. So that means if you look at dividends, you really want to find ones that have a different safety grade of A+ to A-. Those are very, very safe.
Conversely, we rate all stocks, they can be rated a sale, a strong sale of buy or a strong buy. If you look just at the sales, the stocks rated as a seller's cross-sell underperforming the market by 19% in 2022. So that means if you were a hedge fund and you wanted to trade stocks, your performance is far superior than to just shorting the S&P 500.
And also, we have a new product that we came out with last July, that's called Alpha Picks. And Alpha Picks outperformed the S&P 500 by 7.5% in 2022, and we just started that product in July of last year. So we have really good outperformance that I believe validates the process and strategy that we use.
So, what is quantitative? Well, I will tell you, quantitative is not a subjective or [by a superior] [ph]. It is not determined by talking to emotional analyst or a cheerleading CEO or CFO who's really hyped up quantitative investing. It's a data-driven process that relies on computers, crunching historical financial data, as well as professional consensus future estimates. Those are estimates that are generated by Wall Street analysts and we take the consensus growth numbers from those analysts.
So we're blending historical data and future data when we make our assessments. Each metric and data point is scored and ranked. The basis of the quantitative methodology is to give investors an instant characterization of a stocks’ relative strengths and weaknesses compared to its sector. The main factors that we look at are value, growth, profitability, momentum and analyst EPS revisions.
So when we look at score companies, it collectively has to score well on all those metrics. And under those metrics, there are many, many underlying metrics. In fact, every single day, we crunch over 600,000 data points to give investors a fresh opinion of where company stands versus its peer group. The measurement of this leads to directional recommendation being a buy, hold or sell.
The platform itself is very transparent. As we show those underlying metrics that contribute to the recommendation. It is a very user-friendly experience as each metric that we look at, by example, it could be EPE, price to sale, revenue growth, ROE, each of those metrics is given an academic letter grade, A+ through F. And this indicates how that metric compares relative to the sector.
So if you're looking at Exxon's ( XOM ) probability and it has an A+, you know that as far stronger than the rest of the energy sector. In my opinion, this is really noteworthy. Unlike most institutional platforms or investor websites that provide data information, Seeking Alpha interprets the data for investors with that relative score against the peer. Data low can just be a lot of white noise.
So if you're looking at the Bloomberg or Reuters, or FactSet or even many of the other individual investor websites, they'll tend to have market pages and data pages. And to me, that's just a lot of white noise after a while. By scoring it and interpreting it, we're doing the client a huge service, so they instantly know where that metric stands for a company versus its peers.
The SA Grade makes it easy to determine the stocks help and quickly measure the quality of individual companies or entire portfolio is made up of stocks or stocks with dividends or ETFs or REITs. We have grades on many securities. Notably, the Quant System also automatically rank stocks in their sectors and industries. This makes it really easy for the user to know exactly where company stands. Does it rank #1 in the industry? #22? #122?
Seeking Alpha screeners also use these ranking to help filter out investments based on an individual's particular style or financial criteria for any parameters that they want to set up and makes it easy to filter out those names since we have that ranking in place. So that that gives you a little bit about how the Quant works.
Daniel Snyder: There's a lot of background there, right? Like, how hard it is to get accurate data, relevant data, the future data, like, it really is remarkable what you guys have done with this Quant System, but I've got to ask you because some people might be wondering, like, what is the methodology approach behind the system? How do I know as an investor that this Quant System is relevant for how I like to invest?
Steven Cress: Well, I think, one, it's relevant by the recent performance. I mean, we have a back test that goes back to 2010, which people could easily see on the platform. And the back test, let's grade. But to me, like, the real relevant number is look at last year, it was a horrific year for investors. And we've substantially outperformed the S&P 500, whether you were looking at our top scores for our buys and our strong buys, or you took the reverse and looked at ourselves. Either way around, we outperformed. And then when we started a new product that outperformed as well.
But the system, again, it's really a data-driven process that's very transparent. When you're on a stock page, and you're looking at the value page or growth page, you'll see what the company's metric is for PE. You'll see the absolute number. So you'll see, like, PE 10 times. And right next to it, you'll see what the PE is for the sector, it could be 20 times.
So when you see the grade, that grade simply provides you with that measurement of where the metric stands versus a sector. We provide the hard data there for you to see, but that grade just gives that instant characterization, so you can look at it at a glance and see immediately how the company compares relative to its sector. So there's no subjective part to it. It purely is just looking at the data and looking at an overall assessment.
So what we do is we rank all the underlying metrics for value, all the underlying metrics for growth, all the underlying metrics for profitability. And then when we pull those scores together, we can determine if a stock is strong or weak versus a sector just by looking at the data. And that's really how we come up ultimately with that funnel that brings you to the directional recognition of buy, hold or sell. And so all based on where the data is. It has nothing to do with what my feeling is or the quant team's feeling is or measurement of a CEO sentiment. It's all about the data.
Daniel Snyder: All right. Steve, so let me ask you. Does your quant strategy reflect any specific style?
Steven Cress: Yeah. That's a good question. I would say we do have a specific style. We are looking, as I mentioned before, for companies that are collectively strong in that number of factors. I would call that sort of a GARP style, Growth At a Reasonable Price. As I mentioned, we're looking at value, growth, profitability, and we weigh it all together.
So there are many systems out there that simply just focus on momentum, fortress and growth. Being that I've done this for a very long time, I've been running props since 2000 and these quantitative strategies. Personally, I feel like the best long-term strategy is a GARP approach, where you want to have a balance of growth and value and profitability as well as momentum and analyst revisions. These are all very, very important factors to sort of balance out of the equation of how we pick these stocks.
Daniel Snyder: At the beginning of this year, just like you did last year, you put out these Top 10 stocks that I mean, this article blew up on Seeking Alpha, we're talking hundreds of thousands of views. So I want to give people here listening to the podcast a little taste. Could you maybe walk us through one, two, maybe three of the stocks that you had on that list just to what the uptake [ph]?
Steven Cress: Absolutely. Yeah, the article did really well. We had a similar article a year ago. And the cumulative stocks outperformed the S&P 500 by almost 10%. It was a really big outperformance. And we picked some of our favorites last year where Exxon and Chevron ( CVX ) and those stocks exploded to the upside last year. So we had some really good picks, which brings me to the Top 10 this year, very popular article.
So I'm going to give you three of the stocks, and then if you want to find out the rest, you should read the article. And I would highly recommend that you do that because we have some great names. But I'm going to lead off with our - I'll say, our #1 stock, but I don't want to really give any preference of 1 through 10 here.
But the first one we're going to lead up right now with is Jackson Financial; ticker symbol, JXN . Market cap is $3.6 billion. It has a Quant strong buy rating. According to our sector ranking in the financials industry, that ranks #1, out of 665 financials. And then within its industry of diversified financials, that ranks 1 out of 6. Really interesting, this stock also has an amazing dividend yield of 5.13% right now.
For those that are not familiar with Jackson, it is an industry-leading diversified financial services company that's one of the very few stocks out of our entire quant universe of 4,700 stocks that has straight As across the board. That would be for value, growth, profitability, momentum and EPS revisions. It's very, very rare where we get a stock that has straight As, but this is one of them.
The company possesses an excellent valuation framework. The stock has had strong momentum over the course of last year and going to this year. And that's supported by a stellar growth and industry-leading profitability. Jackson offers a number of different services. They offer investment management services, retirement income, and savings products. I think they're very well-known for their annuities.
But in terms of the financials, their PE ratio and PEG ratio are at almost a 90% discount to the sector. So it's an incredibly attractive valuation. We're also expecting to see double-digit growth in 2023 And when you take that double-digit growth, combined with that 5% dividend yield, I think it's a stock that investors should definitely consider as its poised for upside in 2023.
Our second stock is Modine Manufacturing Company; ticker symbol, MOD . This is what I would call mid-cap company, almost quarter-end [ph] small cap. The market cap on it is about $1 billion. This also has a quant, strong buy recommendation. And in terms of its sector, ranks #3 out of 550 companies in the sector. And within its industry, ranks #2 out of 36. This is not a new company. Modine Manufacturing goes back to 1960. So it's got a long history. It's almost over a 100 years old. But it's got an amazing history.
Right now, they're a big player in the automotive and equipment industry, the stock is also trading at a discount with a core PE ratio of only about 12 times. So it's at about a 16% discount to the sector. But on a PEG basis and that PEG ratio to me, it's an all [indiscernible] ratio, because it combines value and growth. The PEG ratio is more than a 64% discount to the sector. The company has been not going to cover off the ball.
Over the last five consecutive quarters that beat both top line and bottom line that have been benefiting from a pricing model that's been very, very competitive. And they also have a philosophy at the company, which is they refer to sort of as their 80/20 rule. And that capitalizes on a philosophy that emphasizes focusing on the highest return opportunities of their products. And I think it's been paying off big dividends for them.
Now, this is in the consumer discretionary sector, and it's not really a typical consumer discretionary stock. But it fits really well for this environment going to 2023. We have strong earnings tailwinds, we have healthy financials, and we have fundamentals that are helping catapult the stock into strong buy territory.
My last of the three stocks is a little bit controversial. It is a Chinese company called Pinduoduo, ticker symbol is PDD . It is a huge company. The market cap is $132 billion. This also has a Quant strong buy rating. In terms of its sector, it ranks #1 out of 550 companies. And within its industry, it ranks #1 out of 63. This is a Chinese e-commerce giant. And it sells products that range from cosmetics to apparel to shoes to personal care items.
However, it's a little bit different than your typical Alibaba ( BABA ) or Amazon ( AMZN ). And as a matter of fact, they actually have more registered users than Alibaba. The platform, it provides sort of an interactive shopping experience along with streaming video. So it has a really unique user-friendly shopping experience that has gained in a lot of success.
Now a lot of you would probably questioning and let's say, why on earth would I be recommending a Chinese stock given the tariffs that are out there, massive protests that are carrying a multiyear COVID lockdown? And my response to that is China has a huge equity market. And if you look back to where the U.S. was, what we just started to open up again after COVID, our economy exploded a rigor. And China is now going into that phase, where they're starting to open up and experience a boom very similar to what the U.S. consumer sector experienced post-COVID.
So I think this is a timely recommendation, but regardless of my opinion, it's all about the data. Consensus revenue growth is estimated at 38% for this company compared to just 11% for the sector, and Amazon at 13%. So its revenue growth is blowing away out of the sector on Amazon. And in terms of the bottom line, the long-term three-year EPS growth estimate is estimated at 42% compared to the sector at a 11%; and Amazon, which is pretty good at 22%, but it still blows it away. On gross profit margins, it comes in at 75% and its return on equity is 32%. So that is the reason why I like this Chinese name, the data is incredible.
So as I mentioned, there are seven other stocks that are just as interesting. I encourage you to read the article and check it out.
Daniel Snyder: I just got to back that up. I mean, so we're talking about a Chinese consumer play. We've got a manufacturing company and then a financial company as well within the Top 10. But your Top 10 also includes, what, healthcare, industrial. Like, you go through every sector within that list, right?
Steven Cress: Yeah, which is really, it's kind of interesting because last year, there was a propensity for the model to really like energy stocks. And that propensity actually dated back to, like, 2021 when, like, nobody was looking at it. I don't think it stops, especially during the midst of the pandemic.
Our numbers were looking really good. The data was, like, coming across for these energy stocks and the model started to love the energy sector. And also the materials and mining sector really came across, like, in 2021. And we ended up having, like, a fantastic year. And the energy stocks, we were really heavily weighted in the model last year, and that's one of the reasons why we significantly outperformed the S&P 500.
I think what's interesting this time around is the model is not so heavily weighted towards energy. And it's just sort of - there's a great deal of diversity coming into this year. And we're seeing companies in the U.S. are, again, early, either industrial companies or financials. But we're also getting a couple of international companies there, too.
Without giving names, we have a BRICS [ph] utility company, and we have a UK British biopharmaceutical. So there's really some great diversity to the list this year. And personally, I feel like when you want to make money in the market over a lot of time, diversification helps tremendously. It really maximizes your returns and minimizes risk.
Daniel Snyder: It's really incredible what you guys have been able to do with just data, right? Removing the human bias and saying, let's just look at the data and see what to say, I mean, even the model like you just mentioned with the oil sector and how, well, I think we all remember when oil went negative. I'm sure every model on this, Steve, was like nobody touch oil and then, of course, oil exploded to the upside. So it almost sounds like the model is in team soft landing mode over here for all of us, U.S. investors.
Steven Cress: Yeah. It's like - well, that's really like the out of the room this week, what's going to happen with the Fed, what's going to happen with the economy, and I really like the diversification that the model is presenting coming into that, who knows what's going to happen. We have another rate hike of, like, 75 basis points and it's followed up by some miserable earnings reports. We could see the market pull back 20% or 25%. If they only come by, like, 25 basis points, and earnings come in a little bit better than expected, we could be off to the races.
So I'm not going to make any predictions as to what the Fed is going to do and what's going to happen with earnings, but I do know I feel really comfortable having diversified recommendations going into that environment.
Daniel Snyder: That's really awesome, Steve. And I know we all can't wait to see how the Top 10 stocks do this year because last year was incredible as well. Steve, I just got to say thank you for taking the time to jump on the podcast here. I know if I'm taking way too much of your time, but just so everybody knows, where can they read more of your research? I mean, you're putting out articles all the time. Where can they find those?
Steven Cress: Yeah. If you go to Seeking Alpha, you could just input my name into the search box and it'll come up and then you could follow me. So you'll - anytime I write an article, you get an email to you. Lots of times, the articles do trend really well. Sometimes you'll see on trading analysis.
But the easiest thing is just, one time go to the platform, put my name in the search box when I come to click on follow and you'll get the articles sent to you all the time. And you were asking, actually, who knows how the stocks are going to do? Well, so far, the Top 10 stocks for 2023 are up 7% year-to-date.
Daniel Snyder: 7%. And I think the - what is it? The S&P 500, I think is up at 5% right now. Today is January 31st, by the way, when we're recording this, just so that everybody can put that in perspective.
Steven Cress: Yeah. So far, year-to-date, the S&P is up 5.76% right now. So, handedly beating the S&P the first 30 days into the year.
Daniel Snyder: Steve, once again, thank you so much. For everybody listening, go to Seeking Alpha, type in Steven Cress in the search bar and click a follow on his author profile. I mean, you're not only doing Top 10 stocks for the year, you did top international stocks, top tech stocks, you're breaking everything down, you have earnings articles where you dive in from a quantitative approach before earning calls come out. Really great research there. So I got to say thank you for all you do. Thanks for the model. Love the data approach taking out human bias, and I just encourage everybody to follow you. So anything you want to say before we hop off here?
Steven Cress: Yeah. No. Thanks. If – yeah, if you'd like to take what the Top 10 tech stocks as well in that article, those stocks are 11% year-to-date. So we have been not going to cover off the ball. And I can't thank you enough for having you at your show today. And hopefully, we'll have people look at these articles and they'll invest well for the New Year.
Daniel Snyder: Just a reminder, everyone, if you enjoyed this episode, leave a rating or review on your favorite podcasting app. And we'll see you again next week with a new episode and a new guest.
We encourage you to listen to the podcast embedded above or on the go via Apple Podcasts or Spotify . Click here to read the full "Top 10 Stocks For 2023" article. Click here to follow Steven Cress on Seeking Alpha. |
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Top 10 Stocks For 2023 With Head Of Quant Steven Cress