Cognitive Dissonance is the theme of the month.
Not wanting to price in reality.
The Global Factor Model is where we screen over 10,000 stocks and score them on estimate revision momentum, valuation and price momentum. We are looking for stocks with positive estimate momentum and low valuations.
The YWR Global Top 30
Cognitive Dissonance Trade #1 Refining: Our top ranked list is flooded with refining stocks. PBF, Bangchak, Star Petroleum, Helleniq, Chennai, HF Sinclair, and S-Oil. Valero and Marathon didn’t make the top 30 but they score well too.
Diesel prices are the highest they’ve ever been, while crude prices are not. Another way of saying crack spreads are high.
But refining share prices refuse to keep up with the surge in earnings, which is why the P/E’s have compressed to less than 5x earnings. Nobody wants to be the idiot who bought refiners on peak earnings.
That’s a valid concern. But 2 pushbacks. First, refinery CEO’s think the same thing ‘This is temporary due to the Iran War and disruptions in Russia’, so they are not out there committing $15 billion for a new refinery which will take 8 years to build. Well, maybe Dangote will, but most will not. In general the companies share your skepticism so the supply response will be limited. Second pushback. If the market doesn’t rerate these stocks it’s a great opportunity for the company to buyback shares, which does make the higher EPS permanent.
Counterintuitively, the trade is to stay long the refiners or even consider whether to buy them.
Cognitive Dissonance Trade #2 is Memory: It’s similar to refining. ‘Memory stocks never make money’ so the experts refuse to put a double digit multiple on Samsung, SK Hynix, Kioxia or anything related to it. Wouldn’t the biggest Mind Splatterer be if memory stocks went up and made a new high?
Top Scoring Industries
This is where we count the number of stocks by industry within the top 300 ranked stocks. We are looking for trends by industry.
Three of the top 5 scoring industries are Iran War trades. Marine Shipping, Refining and Specialty Chemicals. Energy (another Iran War trade) didn’t make the top 5 but also scores well. The Iran War and everything to do with it is what the market refuses to price in.
Cognitive Dissonance Trade #3 Shipping: You know the allegory about the bumblebee? The engineer looks at the bumblebee’s large body and low wing to weight ratio and says this insect should not be able to fly. The physics are all wrong. But the bumblebee doesn’t know better and flaps its wings and flies anyways.
That’s like shipping stocks.
I’ve never met a shipping ‘expert’ who is bullish on shipping stocks. They’ve all seen it so many times before and don’t see any way the current boom in shipping profitability can last. There is technically no way to have a bull market because the shipowners will just buy new ships and kill the pricing. Everyone has seen it 100 times. So you get these stocks paying out insane dividends but nobody cares. It’s doomed. Like memory stocks.
So the stock prices aren’t moving up in line with the earnings and dividends.
Everyone is fading it.
For example, we bought Frontline in March this year at $35/share (A Tuesday Money Maker) and have already received $2.60 in dividends. Today Frontline announced a Q2 dividend of $2.61. And they’ve locked in Q3 tanker rates at the same rate as Q2. We’ve already been paid 16% in 5 months.
At current tanker rates Frontline has a dividend yield of roughly 24%.
Somebody needs to write the bull case on shipping.
Maybe YWR will.
Other notable estimate revisions
Interesting to see positive revisions in software stocks like Adobe, Salesforce, Palantir, Microsoft and Intuit which are supposed to be getting disrupted by AI.
Also notable are the positive estimate revisions for active asset managers (Untouchable #9) which are also supposed to be dead.
A few consumer stocks had signs of life.
And is there something happening at Nike finally? Has it finally bottomed?
I’ll let you review all the data for yourself.
Below are links to:
Global Factor Model Rankings Sheet
Global Factor Model Data App
I also included our inflection screens by country and industry. This is where we search for ‘V’s in the estimate trends which might signal estimate inflection points.
So get a coffee and as usual share what you find.
