Summary
- Performance numbers on past VBR selections are discussed.
- 2 new buy signals are explained.
- Destination XL is highlighted and analyzed in more detail.
It was a rough week for the U.S. stock market. A mass rethinking of the future of inflation and interest rates took place, with bearish assumptions gaining the upper hand. Fed Chairman Powell’s more hawkish Jackson Hole speech over a week ago has set the tone for skittish selling by hedge funds and regular investors. And, a trickle of business guidance warnings has become more pronounced over time since the beginning of the summer. At this point, Wall Street is preparing for a recession in the overall economy going into 2023. Adding to the negativity, real and reasonable doubts about whether the Fed will come to the rescue on further market weakness are now mainstream sentiment.
My personal market musings and forecast has fluctuated from very bearish to start the year, to more constructive (even optimistic) at the stock market lows in May-June, to wondering out loud in late July and August if another round of serious liquidations is coming this fall. I have written several articles over the past few weeks discussing the probability of a developing liquidity crisis here , and the likelihood the Russell 2000 index would rollover here and lead the market lower again into September-October.
However, I am very much a right and left-brain thinker, simultaneously. I can be very bullish on a list of stocks, while I am bearishly-positioned overall in portfolio design, with hedges and positions that increase in value as index values decline. Plus, my purpose on Seeking Alpha is to provide simple buy ideas for readers who may disagree with my macroeconomic calls, but love my stock picking performance. For sure, each individual will have their own view of market direction and future potential. I encourage all investors to go their own way deciding risks and rewards for themselves on individual company names and weightings in portfolio construction. (Note: I am admittedly wrong about immediate market direction half of the time.)
VBR Performance
I am not happy with losing money, as stock market prices declined sharply last week. Yet, I am thankful our Volume Breakout Report picks had a decent week in relation to the big declines in the S&P 500 and Russell 2000 averages. Slight relative gains (actually losing less money) were achieved over the past five trading days. Pictured below are graphs of 27 VBR picks over the previous six weeks for price performance (excluding dividends and trading costs), in comparison to the mainstream blue-chip SPDR S&P 500 ETF ( SPY ) and the iShares Russell 2000 ETF ( IWM ), the closest peer index for the majority of individual selections in this article.
The latest six weeks of choices have "outperformed" the various index changes by +5.15% for a mean average against the IWM and +4.47% vs. the SPY, measured from Friday closing prices and explained in each weekend VBR article. Again, these impressive returns have occurred over six weeks or less.
VBR Picks from August 26th Closing Price
VBR Picks from August 19th Closing Price
VBR Picks from August 12th Closing Price
VBR Picks from August 5th Closing Price
VBR Picks from July 29th Closing Price
VBR Picks from July 22nd Closing Price
New VBR Buy Signals
Thursday and Friday witnessed the lowest number of search results in my quant-focused momentum formulas to date, at least the specific ones I am using to find VBR ideas during 2022. Since rising price and momentum trends are important, steep drops in the market automatically and mechanically generate fewer buy candidates. This situation could be signaling a vacuum of buyers in the U.S. equity market is developing, a harbinger of far lower prices in the weeks ahead. Anyway, I have two interesting picks from earlier in the week to explore.
Destination XL Group
The first buy idea is Destination XL Group ( DXLG ), operating as a specialty retailer of big and tall men’s clothing and shoes in the United States and Canada. While the company came close to bankruptcy in 2020 on pandemic store closures and weak financials, a major restructuring and right-sizing of the company (including share issuance to raise liquidity) appears to have put Destination XL on a better path for investors. A leaner cost structure and an improved online/digital presence have delivered record profitability in 2021-22, as sales have bounced back strongly.
In fact, DXLG has now paid off all debt and is using free cash flow to buy back shares. At the end of July, the company held $129 million in current assets like cash and inventory vs. $102 in total liabilities outside of long-term store lease agreements. Earnings are projected to settle back into a more normal range next year, as sales grow at a slower +6% rate in future years (close to inflation gains). The upside argument is Wall Street analysts have continually underestimated Destination XL’s recovery, and a trend of earnings/sales beats could support further price gains in the stock. Despite an industrywide slowdown in apparel sales from a drop in consumer discretionary spending, management raised guidance for the rest of the year last week .
Seeking Alpha Table, Destination XL - Analyst Estimates, September 2nd, 2022
Seeking Alpha Graph, Destination XL - Results vs. Analyst Estimates, September 2nd, 2022
15x trailing free cash flow and 6x normalized EPS (DXLG took a large tax change gain last quarter) are noteworthy in a retail industry suddenly struggling, with the spike in inflation/interest rates hurting consumer confidence and disposable income.
In terms of investing momentum, Seeking Alpha’s Quant Ranking is now exceptionally positive, in the Top 2% of its equity universe of 4,665 names. Another subtle clue on the potential for even bigger gains is contributors on this website have been caught flatfooted by the strong operating performance. On the table below I have circled the Hold rating from previous author efforts going into next week. I have noticed over many years, when SA Author Ratings are a far distance from the Quant rating, it is usually a profitable course of action to follow the computer-generated forecast. In essence, plenty of new investor interest on top of changes in existing analyst/owner enthusiasm could push price for DXLG considerably higher.
Seeking Alpha Quant Rating vs. Author Ratings, Destination XL - September 2nd, 2022
The striking and exciting part of the Destination XL chart is most retailers have been crumbling in price during the summer. So, a wicked high-volume breakout pattern really stands out. Whether this outperformance trend continues is open to question, and may depend on how severe a developing recession becomes. If I knew consumer spending would be strong in 2023, I would be uber-bullish on DXLG currently.
StockCharts.com, DXLG - 12 Months Daily Values
PrimeEnergy Resources
I have found another small oil/gas play with hundreds of producing wells in Texas and Oklahoma. The company has a history of strong management, efficient operations and above-average investor returns over the last decade vs. the Big Oil names investors have overweighted in 2022. Proof positive of the quality of its business assets and investment setup, PrimeEnergy Resources ( PNRG ) has solidly outperformed the oil/gas industry for price change since early summer. During the first six months of 2022 , revenue grew 127% as production jumped and energy selling prices skyrocketed. EPS went from a loss to $11, with half of the year left to play out. On a prorated basis for the second half, the current P/E is closer to 5x. The balance sheet is getting stronger with $25 billion in cash and current assets vs. ZERO debt and $85 million in total liabilities. Today’s $180 million market cap is quite the steal vs $118 million in tangible book value, holding $568 million in oil/gas wells at cost, depreciated to $173 million in net property. Using first-half results as a proxy, operating cash flow is running at $55 million annualized, for a cash flow multiple just above 3x.
PrimeEnergy fits in the same group as North American producing Barwell Industries ( BRN ) and Evolution Petroleum ( EPM ) as underfollowed, underappreciated small-cap oil/gas investments. If Europe runs out of fossil fuel energy this winter from Russian war-created shortages, these three should be able to rise substantially over the next 3-6 months. And, because of lower valuations upfront than more recognizable oil names, they may offer less risk in a flat oil/gas environment during a recession.
StockCharts.com, PNRG - 12 Months Daily Values
Final Thoughts
The Volume Breakout Report has highlighted a number of winners over the past 10 weeks, during a volatile and difficult market period. For shorter-term traders, strong momentum with outlier trading volume can be somewhat predictive of future price gains. Of course, a diversified basket of selections (at least 20-30 names) is the smartest way to reduce risk, as smaller companies can experience wild price swings, with minor dollar amounts able to move marketplace equilibrium quickly. By the time good news events are released to the public, insiders and knowledgeable long-term investors in each company often buy shares before the typical retail investor can act. The VBR is an early signal tool for investors looking for a trading edge.
If new to the Volume Breakout Report series, you can read past efforts to get a better understanding of this research effort. The July 9th update is a good place to start, with strategies on how to use VBR picks. High-volume advances in price are just one part of the system and proprietary formulas. Daily computer searches that utilize as many as 15 indicators of technical trading momentum are ranked against thousands of equities, to find the best opportunities. Then, a review of company fundamentals and growth prospects narrows each list to the picks I write about.
I suggest readers take the time to do further research into any of the VBR selections that appeal to you, a function of your risk appetite or sector exposure needs in portfolio construction. Understand small-cap choices should be a limited portion of portfolio design, with higher risk and reward characteristics. Please consider using preset stop-loss sell orders to reduce downside potential in individual names. Depending on your risk tolerance, 10% to 30% stop levels are recommended. Cutting your losses quickly is an important part of the investing process, while winners should be allowed to run for a spell. My goal is VBR selections can deliver a win/loss success rate of 60% over 6-8 weeks of trading.
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.
For further details see:
Volume Breakout Report: September 3, 2022 (Technical Analysis)