From the Ground Up

Stocks to watch from our latest scan

Back in 2005, Joel Greenblatt introduced his ‘Magic Formula for Investing’ with The Little Book That Beats the Market. The book details a methodical approach that helps investors find some of the cheapest, most well-operated companies and buy them each month for a one-year holding period.

There is nothing truly “magical” about the formula, and we certainly don’t subscribe to the belief that any one tool will guarantee investment success. What we do believe is that the majority of stock market returns over the long-term usually come from just a handful of the best-performing names, and we should use every tool available to look for them.

It’s our job to find those big winners - the ones will end up on the fat tails of the distribution curve. Greenblatt’s results have shown that sometimes, the biggest winners come from the lowliest of beginnings.

We built our scan with that in mind, focusing first on the best companies in each sector (those that generate the highest returns) and then finding which stocks on that list are held least dear by investors.

Here’s a list of the top-ranked stocks in our universe:

Our goal here isn’t to buy the whole list.

Buying good companies at good prices is a fine place to start, but that alone isn’t enough. Often, there’s a reason that seemingly good companies are trading at rock-bottom prices, and buying them blindly can have us on the wrong side of prolonged downtrends.

The intrinsic value of a stock changes over time, so even cheap stocks that are bought below their current intrinsic value can lose over time. There’s no rule that says a stock price has to move towards its ‘true’ value - and it definitely doesn’t have to do it quickly.

That’s why we couple trend identification with our value scans to find the best companies with the best setups. Merging fundamental and technical analysis helps us manage risk and increases our odds of finding big winners with sustainable trends.

Here are our favorite setups from the list.

First up is Jones Lang Lasalle, an $8.9B Real Estate Services company. Real Estate hasn’t been a very exciting space for investors lately, but JLL stands out. Check out the base breakout for the stock relative to the rest of the sector:

On an absolute basis, we’ve got the same thing going on. Jones put in a failed breakdown in October, then managed to come back and set new 52-week highs before the end of the year. Now it’s consolidating above the 38.2% retracement from the 2021-2023 decline.

Zooming out, we can see just how important that support level near $180 has been over the last decade. It was the peak in 2015, 2018, and again in the early part of 2022. As long as JLL is above that, we want to be buying it with an initial target of $220, and a longer-term expectation that it goes back to the former highs near $275.

In our last iteration of this scan, we pointed out this action in Wabash National Corporation, a 1.3B machinery stock. Nothing has changed about how clean this setup is. We want to buy the breakout above $28 in WNC with a target up at $36, which is the 261.8% retracement from the 2022 bear market.

Jabil is among the largest stocks on our list, with a market capitalization of more than $16B. The long-term uptrend is still very much intact.

On a relative basis, though, JBL just broke down to new 6-month lows relative to the S&P 500 index. We need to see the buyers step in here to reassert control. If they do, we can be long JBL above $130 with a target of $200. But if the JBL/SPX ratio is stuck beneath the December lows, the stock is best left alone.

Alpha Metallurgical Resources, a $4B steel stock, just found support at the 261.8% retracement from its 2022 range. We like the risk/reward setup here, and we want to be buying it above $300 with a long-term target that’s 2x from here, at $640.

Miller Industries is one of the smallest stocks in our coverage, with a market cap of just $550M. But who cares about that when the stock is breaking out of a 3-year base?

We think Miller goes to $63 next, which is the 161.8% retracement from the 2021-2022 decline, and we can own it above the former highs of $47.

SLM Corp could be the next to break out of a multi-year base. If it does, we want to be buying it above $21 with a target of $30.

And CNX Resources, an oil and gas producer, is working on a big base of its own. Since early 2022, CNX has been stuck below the 138.2% retracement from the 2018-2020 decline. We’ve got a nice cup and handle continuation pattern shaping up, which we think leads to an eventual breakout.

There’s likely some resistance at the 161.8% retracement near $26, but we think CNX eventually goes to $40. We like it long above $23.50.

And finally, check out PagSeguro Digital. We do like uptrends and relative strength, but we don’t have to just look at the stocks knocking on the door of new all-time highs. PagSeguro Digital just completed a major reversal from a multi-year downtrend.

We aren’t quite ready to declare a new uptrend for PAGS on a relative basis, but this is certainly constructive action for the stock relative to the rest of the Financials sector, as it consolidates above a key rotational level. With a tight leash above $12.50, we’re targeting $28.

That's all for today. Until next time.