Daily Ticker Podcast: Undervalued Stocks With David Trainer

Daily Ticker Podcast: Undervalued Stocks With New Constructs CEO David Trainer.Today’s video reviews order flow rotating out of the hot tech sector and into three new groups with better reward potential.

We also discuss financial pundits incorrectly making short term calls on long term macroeconomic data.

Which is more important? Reading the current price action or what “should happen” based on the fundamentals?

And finally David Trainer (New Constructs) provides two stocks that are undervalued based on his analytics.

New Constructs

Hey everybody, it’s Pete Renzulli. Welcome to Stock Trading Pro. More importantly, welcome to the Daily Ticker newsletter. Today we have David Trainer from New Constructs. How you doing, David? I’m doing great. Glad to be here. Pete, we have three awesome topics today. You’re going to want to stick around for the entire thing.

I actually wrote them down, that’s how important they are. First, we’re going to talk about sector rotation has tech for 2023. The big AI story wore itself out and. Where are we shifting? We have three different sectors that we’re noticing. Order flow is leaving tech and going into another area. Stay tuned.

We’re going to talk about that Second, which is a big topic of conversation that we had inside of our private community today, is somebody on CNBC today, we’re not going to use any names but talking about how the market is still expected to crash. Now, this guy’s been saying this since January. Again, no names.

That’s not the point. The point of the conversation is timing and what’s going on in the current tape, however you decide to read that. Moving averages, some sort of price, net change, whatever that happens to be. Price, action versus valuation, and where stocks should be based on intrinsic value or the multiple ways that David looks at things.

Or macro economic pictures versus the damn things going up right now. We should be buying it. Trade objective has a lot to do with that. We’re going to dive into that a little bit. Which one’s more important? Is one more important? And then the third one, David worded this very purposefully to undervalued stocks set to shoot higher.

So we’re going to finish up with that with talking about. Two stocks that might be quote unquote undervalued to consider. Obviously everything we talk about is for educational purposes. It’s up to you to make the final decision. It’s up to us to help you make better decisions. That’s what we’re here for.

All right. So David, first on my side of things. As far as sector rotation, we’ve had a lot of conversations about the AI. Tsunami I guess that we had this year, which lifted a lot of tech stocks, some of them more than doubled in a very short period of time. And it just became a point where in our universe, pick a side versus pick a spot.

You put those two things together, order flow, tape reading, and the optimal entry while the side of the tech rally right now is not that hard. To pick, but something that we’ve been really harping on is whether or not at those much, much higher levels, was it even worth it at that time? And we actually just had a conversation before we started about some fund managers chasing these stocks after they’ve gone from 90 to 250.

Look, if you’re a fund manager and you’re chasing it $160 later, there’s something wrong with what you’re looking at. But let’s put the tech aside and say, okay, that might be a little bit done at this point where you need to reset the risk reward or the likely reward for the risk. What are you seeing right now as far as where we’re rotating, where there might be a little bit better reward potential at current levels and where the volume is actually there as well.

I think this speaks to your, the answer to that question or my answer is it speaks to really what you’ve been saying about sector rotation. There’s been so much money in tech, it’s so overbought and that has left so many other sectors under bought. And that’s where I think, where we are seeing multiple great stocks that are super undervalued and I believe set to soar.

Because to your point the amount of money, the sort of avalanche that’s flown into tech. It’s running it’s course. It’s done like how much more bullish can the market be when the Fed Chairman is saying, by the way, we were going to keep raising rates. Yeah. I think there’s a little bit too much emphasis given on the fact that they paused.

That’s right. That’s right. We couldn’t have taken a much, they couldn’t have, the market couldn’t have taken a more positive spin on the pause than possible. And I think there are many factors at play here, Pete. I look, the timing of this is not consequential. I think a lot of investment bankers, a lot of Wall Streeters want to make another big bunch of money before they go to the beach for the rest of the summer.

And guess what? They’re doing it with these stocks that are going way up too much, and then these IPOs, ridiculous IPOs. The Kaba ipo, it’s going to be, I think that’s going to potentially be the next WeWork. It’s so overvalued and the underlying economics of that business are so bad. It’s not like restaurant businesses have ever been a very profitable business.

Tell me the last good restaurant I p o hasn’t been one in a long time. Sweet Green and shake Shack, both, pretty much big failures from the I P O. And we predicted that as well. Yeah, and I think the investment bankers want to see things go great. I think so does everybody in the business, whether it’s the CNBC people, all the Wall Street people on their tag alongs, killing hedge fund managers want to make a bunch of money.

And I think they’ve peaked now. I think that’s why we’re seeing the money start to turn. I think the selling has started on the over bought areas. So we’re talking about under bought. How are you defining? First, let’s we mentioned before we’re talking about financials, energy, and material in your universe, how do you define under bought?

Now we’re not necessarily talking about price as much as they have upside, correct. Yes. Yes under bought really to me means just like a very attractive stock. It’s not a real fancy technical term for me. I would say under bought is just stocks that like, are super cheap with just great underlying fundamentals and then great prospects.

Yeah, we rank all the sectors right now and energy is very attractive. Consumer cyclicals are attractive, healthcare is attractive. Financials are neutral, right? There you go. Basic materials are neutral and we’re, we’ve been selectively picking stocks and all of these five sectors and finding some really good ones.

Now, the fact that you got a neutral here and here means not all stocks are good, but we think there’s a lot of opportunity and some very specific names that look really attractive and I think set to soar because. With the sector rotation. That we’ve been talking about, the money’s going to come back to some of these under bot sectors and it’s going to go to these super under bot stocks.

First on the financial side to, to make your point, the banks obviously haven’t moved the regional banks that’s still working its way through the system. But you start to look a little bit deeper and if you do this stuff like we do every day, which is start out with, if we start out at the sector rotation, comparing that to the market so we can gauge relative strength, relative weakness, whether we want to just be long or hedge, but then you got to go a little bit deeper.

And even though the financial sector has really not moved as a whole the credit services have actually exploded. Higher over the last four to six weeks. So specifically Discover Financial Capital One and even American Express, that basically went vertical for three or four weeks. So if everybody who’s out there right now talking about that, we can’t find anything to do and that, and tech is too over bought, you just got to go look, spend an extra 10 minutes diving a little bit deeper than just the big picture of the sector because.

We’ve been all over Capital One, discover and American Express for the better part of four weeks, and very similar to what we’re seeing in basic materials. Now, a lot of those stocks in the traditional ways of reading the tape or reading the order flow on them, they’re still. Bearish, quite honestly.

But they’re, when you track it from one day to one to the next, one week to the next, you’re starting to see where they’re breaking bearish order flow, but not quite bullish yet. So the way that we kind of word that in our community, less bearish, doesn’t necessarily mean bullish yet. But you got to notice those things because what happens is very similar to what we had in healthcare, probably around.

Three months ago where it basically sold off for 12 weeks in a row and then slowly started to be less fairish and you had a five week period where healthcare was very good. So my point is you start to see the headlines five weeks later if you didn’t do the work in the first place. So that’s what we’re talking about right here.

Just give everybody a heads up financial diving a little bit deeper where we just got a little more specific on credit services. Energy, probably oil and gas. E m p are probably where we’re seeing a little bit more buying pressure right now. And again, those are crude oil. Still needs to get above. 82.

82 has been the level for a while. OPEC tried twice to talk about, we’re cutting and didn’t work. It went up a day, sold off for the next four weeks. They tried it again two weeks ago. It’s coming back down again. Which actually now de ate to that. David, I dont know if you happen to see this, as well as oil keeps going down summertime coming in, we’re now seeing stocks like Royal Caribbean, r c l n c l h exploding.

Rcl has had a chart like I haven’t seen in a long time. Probably another five week rally. You start to put together these kind of cyclical plays. There’s been opportunity, but you need to do that little bit extra work to dig it out. And same thing with materials. We’re starting to see them be less bearish and coming to the other side.

So you want to be ahead of the curve on a lot of these things and catch them technically before they start to make sense. Fundamentally. got to put in that little bit extra 10 minutes worth of work every day. It’s not a lot, but you got to put it in. Yeah, that’s what we, you and I are about Pete is doing that diligence so that you’re making informed decisions.

You’re not just throwing money out willy nilly. Yeah. You’re not, your strategy isn’t FOMO or Momo. It’s it’s having an information advantage and intelligence advantage. That’s the only thing that pays off in the long term. I do want to mention that Discover, was one of our long ideas just a couple months ago.

So we’re, we tend to overlap a little bit more than maybe you think Pete. Good. Good. Actually, that’s actually going to take us right into the next topic which is valuations versus price action. It could have a price action catalyst versus where it is fundamentally. And you could be like, again, like we’re talking about this guy who’s been on c BBC since January, calling a bearish move.

He might be right historically. But what’s more important if it’s continuing to go up, continuing to go up, continuing to go up, such as a macro picture on top of that. Look, Michael Burry had his predictions and it was very well publicized, or, late last year into this year. You can only make your bets on the information that you believe to be valid.

So I guess it’s a Deeper conversations over, over a single malt and a cigar on which is more important or is not one more important than the other? Is timing or reading the tape more important or is valuation? I’m going to throw out my comment on that. Maybe you could give your two your your take on it.

David is neither one of them is right. But you need to know for the objective of how long you plan to hold that trade, how to build an argument before you take risk. So if it’s going to be a fundamental reason, you could be perfectly right, but perfectly wrong on your timing and still have a losing position.

So that’s where the timing aspect of it is, which I, again, you can see all the books, every single place that you’ve ever seen when you, especially when you’re looking at longer term plays. I think one of the mistakes that people make, even if you built a great argument, is timing your way into the position when you get feedback.

So that’d be where the. What they call techno fundamental type thing is where you start to work your way in fundamentally to build that argument for choosing to accept risk, but technically start to build that position only when you get feedback in price action. So I know that you’re much longer term, and I know you aren’t been on Wall Street for a long time.

Do you believe in the way that you do things there, there’s kinda like the peanut butter and jelly thing, or do you think people should just be on one side or the other? I think that’s the beauty of us like talking to each other, is that, your listeners don’t have to choose between those two.

They can have both. And they are the ideal. And I think that’s what the successful money managers do, is they recognize I need to have both. Because to your point and look, when I ran a hedge fund, I had this thrown in my face way too many times. We were right than rain.

We were completely right, long and short about certain stocks, but there’d be certain events that would cause them to continue to be super cheap or to cause them to be even more expensive. There was one short that we put we put on and it was a terrible business. It was about to go out of business, and they announced that, oh goodness, we’re going to hire Bank of America to give us strategic advice.

Which everybody at Wall Street knows is please find someone to buy us before we go bankrupt. I got blown out of the short, but six months later it went bankrupt. You know what I mean? It was just like, maybe it was four months. It was like, oh my gosh. Just, so I think the macro, the tape, all that stuff, it’s important.

It’s absolutely important to say it’s not important is really naive. Even on my old Wall Street, like old school folks, don’t fight the tape. It’s a maxim. Don’t fight the fed. Don’t fight the tape. So to marry those two things together, I think is a superpower. Actually, that’s a great way to word it because one of the biggest problems that people have with making money in the markets is cutting their profits short.

So when you learn to do both, and you have these rock solid reasons why you believe that the company is under, just use undue value just for the sake of this conversation. Those are the reasons that you hold good positions longer. If you’re simply getting out because you had a little bit of a profitable move in your favor, when the whole reason it’s moving in that direction in the first place has this underlying bid that says, no, this is now is when we’re going.

Those are the ones that you want to hang onto. So just for everybody to get like. Deeply thinking into why we choose to accept risk in the first place. The more pieces to the argument that you could put in there that’s going to affect your position size, that’s going to affect what type of trailing stop loss or exit strategy that you use.

And the reason in my experience that a lot of people get good trades but exit them too soon is simply because they didn’t really think through why they’re in the position in the first place. There was no discipline there to begin with. There was no sort of objective decision making, underlying decision making process.

And I, and that’s, I think that’s one of the things you and I are both good at in different ways. We have a very objective, systematic way of understanding fundamentals of valuation. Yeah. You have a very objective and systematic way of reading the tape and understanding sector cation and timing and those two things there’s no other way to do it otherwise you’re, It’s like trying to run a restaurant and making up a new menu every day.

You’ve got to plan in advance and order a lot of stuff in, bring the inventory and understand what you’ve got on hand. And it could be based on the seasons and what’s seasonal in terms of how you do it, and that makes all make sense. But anything that you want to scale and make consistent can’t be done haphazardly or ad hoc.

It has to be done intentionally and with a plan and with diligence and discipline over a long period of time. Yep. One of the things that we teach along those lines of having a plan is everybody understands taking a loss. Like everybody understands stop loss, right? But the level that a lot of people don’t get to is having that same discipline that they’ve learned to have on a stop-loss, on a position that’s given you feedback that’s not working out, is to then the next stage of your development as a speculator is to have that same type of discipline and a planned exit strategy for winners.

And learning how to hold onto the winners. Everybody’s yeah, I got discipline on the ones that aren’t working. What start to have that same discipline on the side of the trade that’s doing exactly what you wanted? Yeah. No. Discipline matters in everything, right? And I think that’s something that’s lost on most of society.

Cause I think most of what corporate America wants to sell us on, you don’t need discipline. You can eat candy and drink Cokes and beer all day and do gummies and microdose and and play video games and that’s it. That’s just, you should enjoy life, be on vacations. No, that’s not the way the world works.

That’s not the way. Certainly not for consistency, that’s for sure. A lot of people search the market for consistency from the market, but what they don’t realize, the consistency and the results that they ultimately get is the consistency with which they follow their edge. But that would require them looking inward for the result instead of it being some mysterious object that nobody has the clues to.

Yeah. Require that you’ve built an edge. A real edge. Exactly that’s, and there’s no other edge that come except that which comes from emo from information advantage and analytical advantage or emotional advantage, which means you just don’t get caught up. But how would you define your edge, Dave the edge that you’ve built over the last couple of decades?

How would you define your edge and why is it different? I would define it as both an inter, inter information and analytical advantage, which I think can give us an emotional advantage. And it speaks to your point, Pete it’s, if you can be consistently paying attention to and holding to your edge, that’s because you’ve got trust in what you’re doing.

And you don’t need to be like the historic or the traditional MR market who is notoriously, overly optimistic and overly pessimistic at times. But yeah it’s a long-term hardcore, like hard work, technological advantage built on fastidiously going through these filings and teaching the machine how to do it for us so that we can get the machine to do more of the work.

And so our experts can focus on more companies and more complex companies that’s giving us an information advantage. We have better data than everyone else that’s proven better data and a better model. And our models are better because they’re more comprehensive and are taking into account these data points that no one else has.

So they’re more complex. So we’ve got a superior model driven by superior data, creates superior output. So let’s talk about a couple of ideas, right? We’ve just gone through the sector rotation, we’ve gone through valuation versus reading the tape. You said you got two stocks that are attractive to you these days.

Let’s take a look and see what you got. Yeah, let’s talk about superior output. We we recently wrote a very good report, I think on Zions. I feel like I should talk about Discover now since we we wrote that one not too long ago too. And that’s, that stocks up a ton. We also like Zions this is a great business and it’s at a super cheap valuation, right?

This ratio is saying that the stock price is implying that Zion’s profits will permanently decline by 80%. All right. And so when we do a report on this company, what we will show you in terms of like risk reward, we’ll talk about how they’ve got a better business in terms of better net charge off any industries better underwriting all the things you want in a than a bank.

That’s the opposite of Silicon Valley Bank, right? These guys are doing it right, resisting the temptation to get into commercial real estate, generating tons of free cash flow. And my favorite chart, Pete, is always, we call these the money charts. This is where we look at the past after tax profits and compare them to what’s implied by the current stock price.

Back when we wrote this, it was 29 bucks. I think it’s up a good amount since then, but this is what the future profit of the business would look like here to justify 29 bucks when we wrote the report. Here’s what it looks like at 60 bucks. You can see that both imply a significant decline, permanent decline and at 60 it’s just a very small increase back to where the profits were.

2018 and 19 and almost back in 2005, just a little bit where they were in 2005 and six. So still pretty relevant. The stock closed just under 28 today, so the numbers are still pretty on, on point there. There we go. Yeah, this, it’s right there. So this is something where the fund fundamentals right, look really good.

That’s going to be all the work we talk about above and the rating, right? The fundamentals are super strong. You’ve got economic earnings are positive and rising. You got a really high return on invested capital, and then the valuation is really cheap as well. A 33% free cash flow yield, a priced economic book value of 0.2, which implies an 80% decline in profits, and then a market implied growth appreciation period of less than one year.

Clearly, there’s no profit growth implied in the stock price, so it’ss actually significant profit decline. That’s good risk reward, Pete in an industry that we think is, just getting trashed because of the fed raising rates and the fear of other banks going under this stock actually took a 50% haircut when the regional bank crisis happened back in March.

And it’s still very close to where it imploded to. The offer is still in there and the market hasn’t started to correct it back to the upside yet. It does imply that this is definitely a price to start considering it. Yeah, absolutely. Stock number two. You ready to go to that one?

Yep. Yeah, it’s a similar situation except this is one where people think about coal and green energy and there’s been a lot of green washing where everything that’s. Not related to green energy is bad and everything that is good and that’s caused a lot of capital to get destroyed as people chase green energy businesses that don’t really work.

This is a really interesting story in that Warrior met coal is a producer of metallurgical coal. Very different from thermal coal thermo coals is the bad coal that creates all the smog and the carbon dioxide and all the stuff we don’t want. And it’s used for creating electricity and heating.

Metallurgical coal, on the other hand, is used to make steel. And guess what? The number one ingredient, or one of the mo main ingredients in all of the green energy infrastructure is, Pete, I’ll take a guess and say it’s that. It’s steel which needs metallurgical coal, right? So what’s happened is that people thrown all the coal stocks out with the bath water and this metallurgical coal company.

Is actually set to do extremely well because the demand for steel is only going up. Whether it’s all all those wind turbines, those solar panels utility companies trying to get to net zero, like all that equipment needs steel, which means, which needs metallurgical coal. You’ve also got tons of huge infrastructure planning, big fiscal policy initiatives that are around spending, whether it’s building bridges or whether it’s trying to get to lower emissions.

And Solar. The solar stocks have been a very big play for us over the last couple of years as well. They’re out of play right now. But could be a good tangential idea. Yeah, that’s right. That’s right. This is so two situations where really the market’s kind of thrown the baby out with a bath water and metallurgical coal and Warrior Mets position in the industry is second to none.

And so they’ve also recently expanded their ability to, to mine more of this very specific metallurgical coal. And again, you’re looking at really strong fundamentals and then a really cheap valuation. This is really similar to Zion Zions at 33% free cash flow yield. And then again, this priced economic book value of 0.2.

So when we look at our report, you’ll see a similar chart. Is what I showed you for Zions, where we look at

right past cash flows, and again, the, we’ve, we had some covid hurt a lot of businesses, right? And so if you look at the long-term trend here, probably more like this, but the valuation saying profits at 35 bucks, right? It’s going to go back to almost covid lows. And then for 71 bucks, almost double.

You just got to get a little bit better than covid lows. It’s a tremendous risk reward. And as Pete’s pointing out, I think with the sector rotation going against, running away from these beginning to run away from these over-hyped, super expensive tech stocks, these are a couple stocks that are great place to put some money and we think will do well.

And what I think is probably going to be a bit of a correction environment here, Pete, in the near future. And then these stocks will probably just soar because there’s so much value there. We’re starting to see a little bit of a correction in any stock that’s not Nvidia right now. Amm D actually sold off on some really heavy volume in the last five days, but as far as h CCC is concerned, warrior Met Coal, looks like it’s basically at a little bit of a technical bend to it.

It’s been trading between 30 and 40 for the better part of a year and a half. So really. To put this in context of what I’d be doing, I wouldn’t even be looking at it. I just have an alert set for 40 and say, wake me up when we get to 40, because it’s just channeling back and forth. It’ll drive you crazy.

You don’t want to tie up capital to something where the way that we look at that’s the right price until somebody comes in and says, no, now’s the time. Set the alert for 40, and if it gets over 40, then pull it back up and see what the volume looks like. I like it. Yeah. People always ask us, what’s the catalyst?

And then I’m like, I don’t know. The catalyst says maybe investors get smarter about these stocks, but that’s not a really good one. I’d rather I like a catalyst that’s based on price, movement, volume. That’s a better, that’s a better way to answer that question. Yep. Yeah, having a ca it’s interesting, there’s so many different catalysts, but the catalyst should be tied to what’s your trade objective.

If it’s just strictly technical, it could be a much shorter term objective, and then the whole trade’s going to be technical, but something like this that has a story behind it. If you start to see the headlines to the story and you see the technical breakout, in this case we’re talking about over 40.

Then you’re starting to cook with gas, no pun intended, there with coal. Okay, so just a quick recap. We talked about sector rotation, we talked about money, working its way out of technology. I want to be clear about this, just so somebody doesn’t, we get a lot of comments. We’re not saying the tech story.

Is off the table. What we’re talking about here is very different, which is the likely reward from these levels to justify the risk. That’s very different than saying that we’ve turned around and now we’re in a bearish move. That’s very different, right? Justifying the risk based on the likely reward.

And what we’re starting to see now are some of the groups that were bearish turned less bearish, if not bullish, and some of the financials that we talked about before, which David had in his financial analysis as well. Also working our way over to energy as well as basic material. Pockets of financials.

JP Morgan’s actually not too far from a breakout that I believe is all time highs. Still absorbing the bank buyout that it did, but it’s right on the cusp of that working our way over to energy. We know OPEC tried a couple times, hasn’t happened yet. So Cruise lines, airlines heading to the upside with a lot of other industrial stocks while energy prices, specifically oil keep going down.

That’s a story right now, we’re starting to see energy come the other way, which again, let’s talk about June 21st, 2023. Energy starts to spike up. You’re probably going to see the money flowing out of the cruise lines and the airlines, especially now that all those tickets are probably bought for the summer.

So you got to start to think through a couple of steps ahead. And then obviously timing, overvalued, undervalued versus reading the tape. Rewind that part. Listen to that. And David just gave us two two undervalued stocks in the way that we’re looking for them to start shooting higher. We took the second one hcc and actually got a little more specific of what I’d be doing with just setting that alert at 40.

We got anything David? I think that’s great, Pete. You got it. Okay. Awesome. David, thank you so much. As always we’ll put a link below to everything we discussed here today and make sure you subscribe. I’d love to see you here again. Thanks so much everybody. Have a great day.

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