From the Ground Up: Stocks to Watch from Our Latest Scan - 12/27/2023

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 “magical” about the formula (or our variations of it), and the use of the formula does not guarantee investment success. Obviously. But Greenblatt’s own results have shown the value of utilizing this simple approach.

We built our scan with the Magic Formula 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 - something known as the value trap.

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

Below, we highlight our favorite names.

First, there’s Mueller Industries. MLI missed the memo that there was a bear market in stocks last year. It’s been setting higher highs and higher lows since March 2020.

And it’s on the verge of a massive, 20-year relative breakout compared to the S&P 500 index. There’s nothing we like more than a stock that’s setting new highs and outperforming its benchmarks. We want to be buying this industrial manufacturer with a target of $66.

Encore Wire is just as impressive. They manufacture copper and aluminum wires and cables, and judging by their stock, business is good. WIRE has jumped from less than $40 in 2020 to almost $200 today.

And consistent with what Mueller is doing, WIRE is breaking out of a massive relative base. Has the stock gone too far, too fast? I don’t know. It just spent 15 years doing nothing. Maybe we’re just getting started.

From late 2021 to late 2022, the stock went nowhere as it digested massive gains from the prior year. Then it broke out to new highs and surged until it found resistance at the 685.4% retracement from the 2019-2020 decline.

We just spent the last 9 months digesting those gains, reminiscent of that previous consolidation, and now the stock is breaking out again. We like WIRE above $195 with a target of $290.

Here’s another stock breaking out of a big relative base: Warrior Met Coal (HCC).

Warrior is midway between the 161.8% and 261.8% retracements from the 2018-2020 decline, so this isn’t a great place for new entries. But we can take advantage of any pullbacks toward $50 with a target of $71, or buy a breakout above $72 with a target of $110.

Sticking with the Materials space, Nucor just broke out of a big base, too. As long as NUE is above $175, we want to be long with a target of $220.

Nucor is in a multi-year uptrend relative to the S&P 500, and though this consolidation has now lasted 18-months, we aren’t seeing signs of a trend reversal. The NUE/SPX ratio just continues to set higher lows. The most likely outcome going forward is higher highs and continued outperformance from this steel producer.

One final stock to keep an eye on is Bluelinx Holdings. It’s a $1B industrial distribution company that nearly went to zero during the pandemic, but just broke out to its highest level since 2006 and is setting decade-long highs against the S&P 500, too. We can be buying BXC above $100 with a target up at $165, which is the 423.6% retracement from the 2018-2020 selloff.

That’s all for today. Until next time.