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Daniel Snyder: Hey, everyone. Daniel Snyder from Seeking Alpha. Thank you so much for taking the time to hang out with us today. I see there’s quite a few hundred of you here live, so we appreciate you for showing up and hanging out with me and Steve. And today, we are diving into Top AI Stocks with short squeeze potential, specifically an angle I know if you’ve been joining these webinars for quite a while, as we go through stock names, people love to ask questions to Steve about short interest, and this one is tailored for you. So, we’re super excited. We’re going to cover some of the macroeconomic things going on around the world, which I’m sure most of you are aware of, but just to recap that and then to get into some of these names. But before we get into all that, let me go ahead and get a quick legal disclaimer out of the way.
We are not advising you personally concerning the nature, potential, value, or suitability of any particular security. You alone are solely responsible for determining whether any investment, security, strategy, or any product or service is appropriate or suitable for you based on your investment objectives and personal and financial situation.
This presentation is for information purposes only. Content is presented as of the date published or indicated and may be superseded by future events. It represents my opinions and Steven Cress’ opinions, which may not reflect the views of Seeking Alpha as a whole.
Past performance is no guarantee of future results, and Seeking Alpha is not a licensed securities dealer, broker, US investment adviser, or investment bank.
And with that out the way, you’re back with the dynamic duo. Steve, I’m so happy that you’re here joining me today. Why don’t we go ahead and get into providing a brief background, but let’s get into the world of what’s going on in markets.
Steven Cress: Absolutely. Daniel, I’ve been in the world of finance for quite a while now, well over 30 years. And the bulk of my career was at Morgan Stanley where I ran a prop trading desk in Quantitative Strategies. I also was the Head of International at Northern Trust Global Investments. I also founded a hedge fund in Quantitative Strategies and a fintech company, which was basically for lack of a better description, a Robo analyst at Pickstocks and Seeking Alpha liked that company so much, they bought it. And that’s what has brought me here today. And one of my favorite topics are Strong Buy stocks that have short squeeze potential.
So, that’s largely what we’re going to cover today. I’ll talk about short interest as a factor as well, but particularly when there’s a high short interest, and I see there’s a Quant Strong Buy on it, I know that company has very good fundamentals, typically very good balance sheets, cash flow statements, income statements, and attractive financial metrics that we look for. So, we’re going to be covering all that today.
First, though, it’s a crazy market out there. There’s been increasing volatility, and we’re going to cover that a little bit. So, for now, I would even say markets have proven themselves a little bit resilient considering the geopolitical shocks. And it may not feel that way because there are many stocks that have come off sharply, but overall, year-to-date, the S&P 500 is only down a percent. So, although geopolitical tensions and the tech selloff, which fuel the market volatility, there has been a lot of solid earnings reports. There has been economic growth. Their inflation was cooling, but obviously, with oil surging from $80 up to $120 back to just a little bit below $100, we’re going to have to see what happens with the inflation outlook.
There’s a lot of unknowns right now, so it’s a little bit too hard to predict, but inflation had been cooling. And we did have three interest rate cuts in the latter half of last year, not so much on inflation, but more on labor concerns. But labor markets have seemed to settle down a bit as well. So, the S&P 500 closed February down a little bit less than a percent as markets really responded to fears over AI disruptors, tariff policy, and obviously, we now have the war in Iran.
Energy and defense stocks have surged, and they were a tremendous laggard last year. This year, they have been leading the way, and that was actually even prior to the crisis that we had with Iran, but now with the U.S.-Israeli operations well underway, energy stocks, and the price of oil has swerved even more. It’s a multi-year high, and now supply chains have been disrupted by this conflict. As the saying goes, history doesn’t repeat itself, but it often rhymes, markets have historically rebounded after geopolitical shocks, dating all the way back to Pearl Harbor.
And that is the point of this slide that we’re looking at here. On the right hand side, you could see the S&P 500 index and selected geopolitical events. And it does seem like history really does repeat itself. After military actions, you do have a drawdown. We could be in the beginning phase of this drawdown. I think when the event first took place last weekend, the U.S. and Israel dominated so much that there were a lot of pundits on TV that thought the crisis could be over by the end of the week.
Obviously, that looks like it’s not taking place. It may not be over in a week, so we’re going to have to see how bad it gets. But point being, during these total drawdown phases, if you look to the far right, you’ll see a lot of green there, 3 months out, 6 months out, 12 months out, and there are usually major rallies that occur after the initial drawdown. And my expectation is that we’re going to see that during this period as well.
So, looking at AI stocks in general that have good fundamentals, probably very timely during this period, but AI stocks that have short squeeze potential where hedge funds are shorting it and the companies have good fundamentals, I would not want to be those hedge funds. Hopefully, they’ll be using these events to basically cover their shorts because it could be very painful when these markets start to rally back.
So, Daniel, I like this chart. I was wondering maybe if you could tell our audience about it a little bit.
DS: Yeah. I want to dive into this. So, to be frank, everybody is watching the oil markets right now. I just took a glance over the oil futures at $96.37 here today at the close. We did a video because you couldn’t ignore what happened this last weekend with oil futures shooting up to about a $120 a barrel. I mean, just unprecedented volatility. So, Steve and the team and I got together, and we said, hey, we need to do some content, help all of you out. What are some energy stocks to diversify around the globe? And we put a video together that we filmed. Actually, I highlighted it here on the chart. That moment right there where we, I mean, when we taped it, was the bottom for the week. And I don’t catch a lot of bottoms.
SC: No, We nailed it.
DS: So, I want to do the victory here. But anyways, everybody, this is on Seeking Alpha’s Video Hub now. You can search Video Hub in the search bar. I’m also going to have the team put it in the chat here. And if you’re watching the video after the fact, you can go ahead and click the link beneath this video after you watch this video and see the five energy stocks from the Quant perspective of what’s going on in the oil markets and how to diversify that play.
SC: Yeah. And, Daniel, it’s really great diversification. Today, we’re presenting on these AI stocks that have very good fundamentals. The presentation was on energy stocks. So, balancing out between the energy stocks and the AI stocks really had some nice diversification. And as you could see in this chart here when we presented, we really nailed the bottom. And what I want to highlight about that was, at that time, I said, irregardless of the outcome of this crisis, the energy stocks we’re recommending at that time had very strong fundamentals, and we anticipated that they would do quite well even without this crisis. And the duration of this crisis going on, we like the fundamentals. So, I really like the approach of the energy stocks and the AI stocks together.
So, going a little bit into what we’re seeing now, finding winners. AI continues to power and pressure stocks back and forth. You could see on the chart that we have here, a lot of volatility with these AI ETFs going – if you’re – it looked pretty rosy from April 2025 up until about October 2025. And, again, I’m sure if you got in a little bit after October of 2025, you really have not recovered. But that tends to happen in periods where you have drawdowns, especially with stocks that are extended in terms of their valuation. And within these ETFs, there are many stocks that are quite extended. And that’s the beauty of the approach that we have here. When we look at these stocks, we’re looking at the single stocks and the fundamentals. It’s not an entire ETF approach. So, securities that we’re highlighting, we believe, are mispriced. And within a couple quarters, they should be trading quite well.
So, the AI, as you could see, lots of disruptors. They sparked sell-offs. Really going back last year at this time. We had DeepSeek. And then, in the third and fourth quarter, investors were really concerned about the valuations even on the Mag 7 stocks, let alone many of the AI stocks. So, we saw a big drawdown occur starting really at the end of the third quarter, last year. But a number of the stocks that we have recommended have done quite well, and that’s typically when we focus on stocks. We’re looking for companies that are collectively strong on value, growth, profitability, positive EPS revisions, and momentum. So, we’re looking for a number of factors. And, typically, when we recommend an AI stock, it’s not going to be extremely overvalued as many of the others are.
So, I’m going to take us to our next slide. So, right here, what we’re showing to you are tech stocks with short interest greater than 20%. You could look at the Quant Rating. So, there are a number of companies that you could see that have short interest that is quite high, and there are stocks that do have poor fundamentals. So, if you wanted to take the other end of this presentation and say, hey, I want to look at companies that are Strong Buys, that have high short interest, but I also want to look at companies that don’t have really sound fundamentals, particularly with the ones where they are Sells or Strong Sells and have high short interest. That’s probably where a lot of the hedge funds have done their research, and they’re actually finding companies that have poor fundamentals. But what we’re doing here today is, we’re actually finding companies that have strong fundamentals that have high short interest. So, our anticipation is that those hedge funds that are short those stocks will be getting it wrong. And when they do get it wrong, history shows there’s typically a short squeeze, and those stocks really do pop.
So, I want to take us to our next slide. And this slide shows us the state of the market right now. So, this is the CNN Fear & Greed Index. It’s really as good as any benchmark that looks at sentiment. There’s a number of indicators that go into it. And I believe when I was making my presentation yesterday, we were actually in the fear territory. I believe it was around 27 or 28. And now we have gone to 23, which is extreme fear. So, markets are getting even more concerned. And when the markets get more concerned and we’re usually in this extreme fear phase, there is a drawdown and a pullback occurring.
Of course, the name of the game is buy low and sell high. So, when we look at the extreme fear territory, history shows us that it’s time probably to start putting your toes back in the water and start purchasing stocks. Because on the other side of extreme fear, you go back to extreme greed. And in between fear & greed, there’s usually a heck of a rally that occurs.
But to add some perspective in it, how fearful is the market right now? Well, it’s actually not quite as fearful as it was back in last April. This next chart shows it’s a line graph, and it shows back in April 2025 when there actually was not even a really hostile war event going on. We did have problems, obviously, with Ukraine, and with Israel and the Middle East, but the U.S. was not involved in confrontation. That was really more led by tariffs, fear of tariffs, and that really took the market down from February through April. Many of the stocks that we liked got crushed during that period, but we’re encouraging investors during that time frame to pick up those stocks. And, boy, were they handsomely rewarded and they did.
So, what we find now, if you go to, not the far right, but you’ll see after October, I had mentioned earlier, there was this AI pullback. Many investors were concerned about the extreme valuations, and that’s at a point where we actually saw the Mag 7 stocks starting to come down as well. The market was quite fearful during that period as well, more so than it is now with a hostile war going on.
Now, of course, we’re trending down with the Fear & Greed Index, and, certainly, we could see it get down to those levels again. But, really, typically, anytime that you’re in the extreme fear, if you start adding to positions, it’s usually pretty good. Could take couple more months. Could be, not until May. Last year, I believe the market when it hit extreme fear, it was weak from February through the end of April and started to recover somewhat around the May time frame. So, it’s tough to, like, pinpoint when the market’s going to bottom. You don’t have to try to pinpoint it, but you could start taking, positions in stocks that have come off sharply that have very good fundamentals.
So, a little bit more history to show what happens during periods like this. Back during last April when the market was coming off and a lot of the Quant Strong Buys, which have great fundamentals, were coming off even more. And the reason why that happens is there’s a rotation when there’s fear in the markets and sentiment is driving that fear, investors tend to rotate to safe haven sectors and asset classes. And in order to do that, they sell stocks that have good fundamentals.
They just want to raise cash. They want to protect their portfolio. So, it’s, when people are in a panic mode, it’s more important that they put money into cash or gold or to consumer staples or utilities, and they take it out of sectors where that typically have traded well and stocks that have traded well. And that’s what creates the opportunity. Fear creates losses. Conviction creates opportunities.
So, I wanted to demonstrate a little history of what happens. So, we went back to 2010, and we did – the Seeking Alpha performance analysis by the Quant Team. So, we went back to 2010, and we looked at five market pullbacks where the market had fallen at least 15%. And the rule of thumb basically was if you bought just the S&P 500 during those five pullbacks, when it hit that 15% level, on average, if you held it for two years, you had almost a 50% return on your money on average.
However, if you actually bought the Top 10 Quant Strong Buy stocks and typically, when the market pulls back 15%, those Quant Strong Buys have pulled back 20%, 30%, 40% in many cases. Those are the stocks with good fundamentals. That’s where people try to raise cash. They sell those good stocks, so they come down even more than the market. So, if you bought the top 10 stocks when the market had pulled back 15%, on average, two years later, you were up a 117%. So, just that chart highlighted before during war like events going back to Pearl Harbor, you have that initial drawdown, but then just as soon as even 3 months out, 6 months out, and 12 months out, the market goes higher. Same thing with pullbacks in general. We found on average, when there was a 15% pullback, you did very well by holding the market, but you did even better by purchasing Quant Strong Buys.
So, I want to get us to where we are with interest rates. For the next upcoming meeting, basically, a 100% of interest rate traders do not believe there will be a rate cut. That is a very, very different scenario than people had anticipated back in the third and fourth quarter of last year when the belief was by interest rate traders that we would have three rate cuts in 2026.
Obviously, the world has changed. Inflation has remained sticky. Labor was a little bit firmer than expected. And now we have events, where investors are believing that we may not have a fall to fairly, far out in this year. So, instead of, like, looking at this month or the next one or two FOMC meetings, we actually have to go out to September 16 before interest rate traders place any probability that there’ll be a cut. So, here, when we go to September 16, 55% of the interest rate traders believe there will be no cut, 35% believe there will be a 25 basis point cut, and 8% believe there will be a 50 basis point cut. So, clearly a different scenario than we had in the third and fourth quarter, last year. In the near-term, nobody’s expecting any cuts, so we’ve got to push the possibility of interest rate reductions out to September.
Alright. And, Daniel, this was a really interesting article you brought to my attention.
DS: Yeah. This is from our own Liz Kiesche here at Seeking Alpha. She just put this out within the last hour, actually, highlighting, and specifically, I want to point out that second paragraph there, that the shifts today alone that we were seeing in the bond market and what interest rate traders are doing, no one’s expecting a full 25 basis point cut the rest of this year as of right now. Obviously, ties into that oil, that possible reinflation side of the trade. We’re going to definitely want to monitor this as everything in the Middle East unfolds, but as you mentioned, a shakeup from what traders were originally expecting before we even started this year. But shout out to Liz. Thank you so much for putting this up on Seeking Alpha.
SC: Yeah. There’s a lot of confidence in third and fourth quarter that we were going to see three rate cuts, and people, yeah, have changed their perspective on that. So, we’ll see what happens as the weeks and months ahead play out. So, that brings us to AI. Right? Now, the AI stocks have come off sharply. They’ve come off sharply because of investor sentiment and fear based on extended valuations, based on, a lot of competition that is producing more efficient technologies. So, a lot of fear has been driving the prices down in AI stocks. But I’ll tell you what has not come down really is the anticipation of the level of demand and what that means.
So, as you’re looking to the chart on the right, which is an artificial intelligence market chart, it is showing where we are in 2026 and the anticipation by analysts of where we will be in terms of the market size by 2033. So, AI market is expected to hit $3 trillion at that time driven by big tech investments. And, look, for that matter, everyday individuals like myself and Daniel use AI. And I have really found very, very few people that are not using it. So, on an individual level, at a corporate level, there’s been a rapid, rapid adoption of AI, and it’s growing at an unprecedented rate.
ChatGPT is a great example. Right now, has over 1 billion monthly active users, and that’s up from just 200 million only two years ago. So, just tremendous numbers in terms of the growth that they’re experiencing, and there’s many other sites that are coming to market and many companies that are coming to market that provide efficiencies because of AI.
The demand for AI infrastructure has outpaced supply. There are critical technology shortages, including memory chips and advanced networking hardware. There’s also been a tremendous demand on energy as well because data centers, which hold the servers, which hold the chips that basically power AI, there’s been a huge demand for energy. And now with oil at this level, it really, it could be quite inflationary. So, the marketplace has the demand. The stocks have come off, but the stocks have come off of fear, which has been driven by sentiment. Typically, what we find that happens is a couple quarters out, companies continue to provide earnings and revenues that are better than expectations, and then you see a rapid change in the market from fear & sentiment to fundamentals. And it’s likely we’re going to see that play out over the next couple of quarters.
And in fact, so far, most of the companies that have reported have actually reported pretty good numbers. The stocks are still coming off, but they are still for the most part, many AI companies are beating both top and bottom line.
So, why do we use Quant? Well, Quant is a very efficient tool in itself. Really, probably an early version of AI where many of the Quant models that existed. So, what we do with Quant? It’s really similar to what an analyst does at Merrill Lynch or Morgan Stanley or Goldman Sachs. We look at investment characteristics, and we look at fundamentals for companies that are very common to what analysts do.
However, we add the power of computer processing. So, with the power of computer processing, we have the ability to look at those fundamentals and come up with directional Buy and Sell recommendations, but we could do it for – we at Seeking Alpha, we assess almost 5,000 companies on a daily basis, where with an individual analyst, when I was an analyst, you could really, at the most, maybe cover 20 companies. And when you’re covering 20 companies, maybe you could write two full research reports a month if you’re lucky.
The beauty of Quant is that we get to evaluate these companies and refresh our data every single day. Every day, we provide you with a fresh directional recommendation. That Strong Buy is based on refreshing the balance sheets, income statements, cash flow statements, and comparing the companies on hundreds of financial metrics to other companies in the sector, and that gives us the ability to rank all the companies and to separate the strong ones from the weak ones. So, that’s why we use Quant, and we’ve got a good track record.
Here, you could see the last five years. These are simulated trades. This is not a back-test. These are actually the simulated trades that occurred at Seeking Alpha running our Quant Strong Buys. I want to say, this is not an investable product, because this reflects on any given day anywhere from 350 to 400 Strong Buys. But the point being, we want to show the strategy that we use, which is very similar to a GARP like strategy, Growth At a Reasonable Price, where we focus on value and profitability and growth and positive revisions, this demonstrates that the strategy works well.
So, we rebalance every day, and you could see over the last five years that our Quant Strong Buys are up a 156%, and that is versus Wall Street Strong Buys up only 6.35% for the same time over the five years. That hurts. The S&P 500 definitely exceeding Wall Street analysts, up 53% from that time. But as you could see, the Quant up a 156%.
Going to take us to our next slide, which we’re going to get into our Top AI Stocks with short squeeze potential. The way I pick these stocks is, basically, I look for short interest levels, and I look for companies that have good fundamentals. And we actually, you could put this in a screen. We have screens and portfolio tools at Seeking Alpha, and you could identify companies based on the Quant Ratings that we have for value, growth, profitability, and the directional recommendation, and then also identify companies that have a high short interest level. And that’s in essence what we did. It’s a fairly easy exercise, but it works quite well. And we love identifying companies with strong fundamentals that have high short interest because we normally get a squeeze when the hedge funds have to cover their shorts.
So, a little bit about the five stocks that we selected. These five companies have a forward revenue growth rate on average of 21%, but more importantly, they have a forward EPS growth rate of 72%. So, to put that in perspective, if you look at the S&P 500 forward growth rates, the revenue growth rate for the S&P 500 is only 6%, and the EPS revenue growth rate is 10.6%. So, these five companies stand at 72% EPS growth, compared to the S&P 500 at 10.6%. And if you wanted to extract the Mag 7 stocks, they have an EPS growth rate of 20%. So, these Top 5 AI Stocks have an EPS growth rate that is far, far superior to both the Mag 7 and the S&P 500.
So, our first stock is Lumentum Holdings, ticker symbol LITE. It has a market cap of $47 billion. It’s a Quant Strong Buy. It is in the IT sector, obviously, as most of these companies will be. It ranks 3 out of 527 companies within IT, but more importantly, within the communications equipment industry, it ranks 1 out of 37 stocks. This stock has had a heck of a return. It is up almost 1000% over the last 52-weeks, but I will tell you not to be dissuaded by that.
If you look at the far right side, you will see the factor grades. These factor grades are all sector relative, so it shows – what I want to highlight here is the valuation. It is a D, so it is expensive versus the sector, but importantly, it was a D six months ago. So, despite the stock being up almost a 1000%, it has almost the same exact valuation that it did six months ago. And short interest level is 15%. The growth grade, the grade is A+ versus an A+ 3 months ago and 6 months ago. So, the growth is very strong. The valuation is the same. It is a little bit expensive, but it is a Strong Buy. And you could see – I’m actually going to take us to the platform here, Daniel.
So, we’re going to pull up the company. We’re going to give us just a second there, and you’re going to be looking at our stock page. Stock taking a hit today with the market. It’s down 8.3%, so that probably presents a nice opportunity because you could see, as I mentioned, over the last year, it’s up 862%. Year-to-date, the stock is up 67%. So, a little bit of a refreshing pullback here where the stock even up so much this year, but I want to go into the valuation grades, and you could see the valuation of the current one. It’s actually, changed. It’s a D+ now, so it’s actually more attractive in its value than it was six months ago when it was a D-.
So, I’m going to click on valuation, and you’ll probably see a bit of red here for the conventional metrics such as P/E and for EV-to-Sales, but what looks good is the PEG, and what the PEG ratio is, it combines the P/E and the growth together. So, you’re getting that combined valuation framework of growth and conventional P/E, and it comes in at 0.89 versus the sector at 1.27. So, on the PEG metric, it’s actually almost a 30% discount to the sector. So, that B+ really helps to bring up a lot of those Fs that you see, because it’s a great feature to pull the growth together with the P/E simultaneously.
Now, if we look at the growth for the company, you are going to see a straight A report card. So, the revenue growth, going forward is 51%, compared to the sector at 10%. You could see the EBITDA growth rate is a 129% versus the sector at 14%. And then if we look at the EPS forward growth rate, it’s a 142% versus the sector of 14%. So, you could see why I like this company. Its growth is an outlier compared to the rest of the sector. So, even though the valuation and P/E is a bit rich, when you combine that P/E with growth and value, it does look attractive. So, this, again, is Lumentum Holdings, ticker symbol, LITE.
I’ll take us back to our presentation. Enlarge the deck for those who are on their phone. Our number two stock is Fastly, ticker symbol FSLY. This is a smaller market cap, but it’s still, I would say a large cap company. It’s definitely not a small cap company or a mid cap company. Its market cap is $3.45 billion. Within the IT sector, it ranks 4 out of 527. And this company’s, the sector, the industry that it’s in, the industry is the Internet services and infrastructure, and it ranks 1 out of 23. Over the last 52-weeks, the stock is up 266%.
Now, I will say, if you look to the right here on the valuation, it is definitely more expensive than it was three months ago and six months ago, but the growth is still very strong. And you could see on the chart underneath it’s really been moving up. This is a Cloud platform operator focused on cybersecurity, which is particularly important in this environment, network optimization, and AI heavy content delivery.
It has a forward EBITDA growth rate of 66% versus the sector at 15%, and its operating cash flow growth is 110% versus the sector at 15%. The leverage free cash flow margin is 23% versus the sector at 11%. So, again, it’s got a high short interest level at 11%. And you could really see, if you look on this chart and the Quant rating history, it was a Hold temporarily, but during that Hold, the stock really shot up, and I believe that the hedge funds are beginning to feel that squeeze. Alright.
DS: I want to answer real quick too, Steve. Real quick on Fastly. I think some people might remember this stock as well during the 2020 craze of the markets because if you go back and look, I can’t remember if it was a SPAC or not, but this stock did explode during that time. It was north of a $100 a share. It has fallen from grace on the share price, and it looks like there’s a little momentum ticking in. So, that’s an interesting short that you point out.
SC: Absolutely. Yeah. Thank you for highlighting that. Number 3 is Ichor Holdings, ticker symbol ICHR. This would be a mid, really small cap company at $1.51 billion. It ranks 6 out of 527 within the IT sector. This is a semiconductor material and equipment company. And within that industry, it ranks 1 out of 32. Over the last 52-weeks the stock is up 81%. I would hate to be short that stock over the last year, up 81%, especially some of the other ones.
Now, what’s really interesting about this is despite that stock being up 81% the valuation grade actually looks really good. It’s got a B+. So that means that it’s inexpensive compared to the sector, and the growth grade is an A+. So, the stock is cheap versus the sector. The growth is stronger than the sector. Profitability is not great, but the stock has a lot of momentum. And in fact, if you look at the momentum, it’s an A+ now versus six months ago was an F. So that momentum grade highlights that the stock’s price appreciation, compared to the sector. So, that’s momentum. It’s in a relative term, not absolute momentum, but relative to the sector, it has been far, far stronger. And it looks a lot better than it did six months ago. And analysts increasingly are becoming very, very positive about this company. You can see the revision grade, and that revision grade reflects the number of analysts that are actually taking their estimates up. So, the company is far more attractive to analysts now than it was six months ago when it had a D- grade. So, a lot of analysts revising their estimates up, and obviously, you could see that in the price appreciation.
In terms of the company’s growth rate, that’s a long term 3-to 5 year CAGR growth rate of 70%, compared to the sector at 16%. The ROE growth this is not the absolute ROE, but the ROE growth, year-over-year is 96% versus the sector that only has an ROE growth rate of 3%. And the PEG puts it at a 57% discount, so attractive across a number of valuation metrics. So that framework looks good. I would not want to be short this stock.
Our stock number four is EZCORP. This is actually not a technology company. Small cap, $1.63 billion. It’s within the financials sector, and this more or less is a leading provider – sort of like a pawnbroker transactions, but they are leveraging AI driven tools such as their app, which now exists, which is the EZ+ app, and it will give you an online instant quote. So, that’s been a very, very popular platform for, I would say, within the pawnbroker industry.
Within consumer finance, which is where the company falls, it ranks 1 out of 38. And within financials in general, within the financials sector, it ranks 6 out of 673 stocks. You’ll probably see a lot of individuals in this type of environment. They become a little bit less favorable on financials, but in this type of financial, they actually tend to do well during periods where there could be the threat of a recession or difficult periods in the economy. So, this is a little bit of a hedge of the finance sector. So, even if finance could be coming off hard, this type of company typically would do well during that period. And, certainly, we see that in their earnings.
The forward EPS growth rate is estimated at 22% versus the finance sector at 13%. Their operating cash flow growth rate is 25% versus the finance sector at 10%, and the PEG, has it at a 19% discount to the sector. The short interest on this company is 22%, so that is rather high. Again, I would not want to be short this company.
And this company, I was really surprised to see, short interest, not as high as some of the others. Dell actually has a short interest level of 8%. I do find that a little bit surprising. This is a huge, huge company with a market cap of $95 billion. Within IT, it ranks 12 out of 527. I probably don’t have to tell you, everybody’s familiar with their products, from computers to storage to peripherals, technology hardware, full service technology company, and it looks really good now.
If you look at the factor grades, you could actually see, the valuation grade is a B-. So that means it’s inexpensive compared to the IT sector, and the growth grade is B+, which is really solid. Obviously, a very profitable company with an A+ for profitability. Momentum is stronger than the sector with a B+ grade. And analysts increasingly looking at the company with an A- grade now versus six months ago where it was at a B. So, this means more analysts are taking their numbers up than are taking it down. So, that’s very positive. In terms of their EPS growth rate, it is 21% versus the sector at 15%. The return on capital is 19% versus the sector at only 4%, and the PEG is at a 44% discount to the sector. Hard to imagine why people are short this stock.
I would say all five stocks look attractive at these levels. They might get more attractive as the markets come off, and we continue to see more fear in the markets, so it presents an opportunity. And then when people start buying these stocks, that’s when the short squeeze can really hit, and it will hit those hedge funds hard.
So, here’s a little bit of the picture of our Top 5 AI stocks with short squeeze potential. Could these be the next GameStop? Well, they can actually perform better than GameStop because they have better fundamentals than GameStop does. So, we’re looking at companies with decent valuation frameworks, very strong growth, solid profitability, very strong momentum versus their given sectors, and very positive EPS revisions given their sectors. And they have high short interest levels. So that means, if you’re short of the stock and they do well, you’re probably going to get stuck in a short squeeze.
And Daniel, that really brings us to the end. I will say I often get outside of the articles that I write in these webinars, what ways are there for people to participate in the Quant Strong Buys? So, I’ll quickly review two products that we have. One is a PRO Quant Portfolio, and the other is Alpha Picks. Alpha Picks has been around over 3.5 years. Now, what we do is, we send out an email twice a month with our Top 2 Quant Strong Buys, and the product has performed very well.
You could see since inception, actually, this is the one year return. Last 52-weeks, Alpha Picks is up 76% versus the S&P 500 up 20%. Since inception, it’s up a whopping 300% compared to the S&P up about 50% for the same period. So, whether you’re looking back 3.5 years or over the last 52-weeks, Alpha Picks has done extraordinarily well.
Again, we’re looking at our top two picks. We send out an email, the trading day closest to the 1st of the month and the 15th of the month. And, typically, there’ll only be two to three trades.
We did survey our Alpha Picks customers and they actually said they want more ideas. So, we came out with the PRO Quant Portfolio last June. The PRO Quant Portfolio since last June is up 34% versus the S&P 500, up 11.93% for the same period. That actually rebalances on a weekly basis. So, it’s a fixed portfolio. So, instead of just adding two new ideas a month, we have a fixed portfolio, and we rebalance it every week. And, typically, on a weekly basis, there will be two to three new trades, and this has performed quite well.
We find Alpha Picks, we put a little bit more in terms of parameters because we designed it for long term investors. So, market cap has to be over $500 million. Stocks cannot trade under $10. With the PRO Quant Portfolio, a little bit more risk there. We look at stocks all over the world through ADRs. There is no market cap restriction, and there is no minimum in terms of the share price. So, one takes on more risk, but could have a higher return. We’ll see. Both products have performed extremely well. And, Daniel, I believe that is it. So, any questions out there.
DS: Yeah. We’re going to dive into questions. I mean, Steve, I know I was surprised by Dell Technologies, just personally myself. When I saw this list today, I was like, are you kidding me? Everybody knows Dell. Like, some of these other ones, I’m like, oh, yeah. No names. Like, I know they’re short interest can be high and low, whatever. But, man, that one surprised me.
So, before we dive in, everyone, if you haven’t already, go check out Alpha Picks. Go check out PRO Quant Portfolio. The links are in the chat. The links are beneath the video here as well. And as Steve mentioned, I mean, his team’s on top of everything there. The results speak for themselves. That’s the greatest thing about it. It’s make it easy for us to have conversations. Where you have a good product, it’s easy for people to see the value in it and find the help in it. So, I highly encourage everybody to go check those out.
Steve, I feel like, I should have done this earlier in the presentation. I think it’s a missed opportunity, but we should touch on it now. There was a question that came in that was, how does a short squeeze work? If you can break down the basic concept of what happens in the market dynamics when something like an earnings announcement hits and we see that pop in the price, why is that?
SC: Okay. So, typically getting you familiar with the concept of shorting, hedge funds will typically short stocks, and what they do is, they borrow shares from somebody who’s long the stock. And when they borrow their shares, they sell them immediately. That process is called shorting, and, that reflects the short interest. So, as an example, if you look at the first stock here, Lumentum Holdings, and we go to the short interest column, you could see that 15% of the shares are short. So, that’s fairly high.
If we go down even further to EZCORP, we could see 20% of the shares outstanding are short. So, that means that hedge funds have borrowed as much as 20%, and to be precise, 21.62% of the stock they’ve borrowed it, and they have short the shares. Now, if the stock goes down, that works well for the hedge fund because at the point that they initially borrow the shares, they sell it immediately. So, it’s still the same concept in essence of buying low and selling high. They’re selling it high, and then they hope to Buy it back at a lower price.
But the short squeeze is a situation where actually the company does well, and the share price does not go down, it actually starts to go up. And if you’re a hedge fund and you’re short the shares and it starts going up, it puts them in a difficult position. And what will happen is it’s hard to cover their position. It usually takes a couple of days with many stocks. Once they even have a smaller cap, it could go up potentially days and days before they can cover the shares that they’re short. And that is what we refer to as the short squeeze. When they’re in a position and they can’t cover the shares that they’ve borrowed, and they have to buy it back, that’s known as the squeeze. And, boy, is that painful if you’re a hedge fund? So, if you’re a hedge fund and you own GameStop, you are crying or you’re probably losing your job if you were short that stock.
Could end up being the same with many of these names because as we’ve highlighted, the fundamentals, most of the valuation frameworks are quite attractive. The growth is attractive on all of these companies. Profitability is pretty stable. But in terms of the outlook from analysts, not only is the outlook now positive for these companies, but analysts increasingly, as you could see through that EPS revision grade, are getting more positive on the stock. So, if you’re a hedge fund that’s short this stock, I would not want to be in that position.
DS: It’s also worth mentioning that, it could happen at earning announcements. It could be a merger and acquisition. It could be news hitting the headlines from a company itself. There’s a lot of different moments in history that we could point to where short squeeze has just ripped. And then you have the days to cover, which is another important metric in the short world of how the market dynamics work there, but in essence, thank you so much for this, Steve. That that was a great high level explanation.
Steve, would you mind going back to your slide that has the returns of the Top 10 stocks during the times of market turmoil. Because there’s a question here that came in, asking which stocks were these Top 10 picks based off the Quant system? Keep going. I’ll tell when the slide is. I think I you know…
SC: I know exactly what you’re talking about.
DS: There it is. Right there. So, they’re asking, which 10 picks are these? Are they the Top 10 picks that we give out at the beginning of the year on the event that we do, or is this the Top 10 from the webinar?
SC: No. This would be the Top 10 ranked Quant Stocks at the time of the 15% pullback. So, like, last year, if we went back to April, I think, maybe it could have been in March where the S&P 500 was actually off 15% from its high. So what we’re doing is, we’re taking the market when it’s pulled back 15% from its high. So, it’s at that point in time. So, this is not like my Top 10 stocks of January. It could be at any point where that 15% pullback occurred. That’s when we’re looking at the Top 10 Quant stocks.
DS: Alright.
SC: Hopefully, that answers your question.
DS: Yeah. That was a great clarification. Alright. Let’s see here. I’m going through some of these questions. Great feedback from some people as well. How long do you Hold the stocks in the Alpha Picks portfolio, last year?
SC: Good question. We actually Hold them for a 180 days. I often tell people Hold does not mean Sell. Many times, the stock will be a Strong Buy, but the valuation framework could get temporarily expensive, so the stock will drop to Hold. Often time, as analysts have a chance to reevaluate their opinion and they take their earnings estimates back up, those stocks could and often go from a Hold back to a Buy or a Strong Buy. So, that’s why we advise people not to typically Sell when it’s a Hold.
When do you Sell? When the directional recommendation is Strong Sell or Sell, that’s when you know to Sell the shares. I will say, with Alpha Picks, we wait a 180 days because at that point, if a stock has actually been a Hold for a 180 days, there are companies that are Stronger Buys that we could find that usually present a better opportunity.
DS: Alright. So, quick question on the short interest that we have here on Seeking Alpha. I know you’re very plugged into the Quant system and the market data. Where do we pull the short interest data from that comes to Seeking Alpha?
SC: We actually pull from FINRA. So, it’s an agency that we pull from. We used to pull it from, I believe, S&P Global, but now we actually go directly to FINRA to get the information. And I will actually highlight – let me show you where you could find that too. So, I’m going to go to any – you could go to any stock page, and on the stock page, you will see the short interest level, and you can actually hover over it. And I believe somebody had a question on short interest. This is as a percent of shares outstanding.
So, one of the great things about Seeking Alpha is, we provide definitions for most of the metrics, and we show you the definition for short interest here. That is a short interest level at 15%, and it comes directly from FINRA.
DS: Wonderful. Alright. So, Russell asked, I guess, for a clarification, is the short interest based on the total number of shares or the float?
SC: That’s based on the total shares outstanding. So, I’ll go back there again.
DS: Yeah. Outstanding specifically.
SC: Right. And, you could see short interest is the percentage of shares outstanding that have been sold short, but have not yet been covered out or closed out. Short interest is as an indicator of market sentiment. Extremely high short interest shows investors are very pessimistic. And, importantly, I want to show you if you go to the screening tool, you go to the stock screener.
These are the screens that I’ve set up, but you can create your own screen. And when you go to create a new screen, you’ll see all these various areas that you can click on. You could have trending topics. You could have the ratings. You could have the Quant Factor Grades. You have trading. We’ll click on trading. That’s the price. I’m going to show slide down here, and we’re going to go to risk. And when you go to risk, you could select short interest. You could select days to cover.
So, it’s that easy to incorporate these metrics in. As I said, I’m looking for Quant Strong Buys, with stocks that have solid fundamentals. So, that’s what goes into this. And, actually, if I cancel this, I will show you my screen and we’re going to go back to stock screener. And these are Seeking Alpha screens and my screens. And when I click on my screens, and you’ll see I have a lot of screens. I’m a screen junkie, and I’m a portfolio junkie, but I’ve created these screens in advance.
So, anytime I want, I can go to it. And here we have Strong Buy stocks with short squeeze potential. Look on it, and there’s 31 stocks that come up that have a fairly high short interest level and a number of those stocks I recommended today. And you can actually sort it too by looking at the amount of short interest really easy. So, I just clicked on short interest. So, if you want ones that have really short, high short interest that are Strong Buy, you could see these right here.
EZCORP is one of them, but you have a biotherapeutic company, which I’m not that familiar. Iovance Biotherapeutics, that is the number 1, with strong fundamentals and a high short interest. 3D Systems Corporation with a 24% short interest. So, just a really cool tool. Lots of great tools on Seeking Alpha.
DS: Yeah. Incredible what had been built out. Some more follow-up questions that have come in during the webinar today. People are asking, how do they know when to Sell any of these stocks? As well, there’s a question about when should you take profits?
SC: When should you take profits? Well, really, I don’t know what your risk tolerance would be. It’s based on how much capital you have, how much diversification you like in your portfolio. But with the Quant system, we indicate when we’re – basically it’s a data driven process, and we’re using mathematical models. And we’re measuring data for a company versus data points for other companies within its sector.
So, we provide you with that directorial recommendation. If it has a Strong Buy and you feel your position has doubled, you may want to take some profits. You may wait for a stock to go up a 1000%. It’s really hard for me to provide that type of guidance when to take profits. but, again, we have our directional recommendations, which show Hold, Buy, Sell, and Strong Sell. So, clearly, if a stock goes to Sell or Strong Sell, that is when you would not want to be in the shares.
DS: Yeah. And if you’re like me, it’s when you can’t sleep at night and you’re thinking about it so much. It’s not worth your sleep. Alright. Great. So, let’s see. Do we use any stops with the Quant System?
SC: Do we use any stop losses?
DS: Stops. It’s like stops, stop for, like, a Sell order.
SC: Yeah. I do not use stop losses. I have back tested stop losses, and I found that they’re very ineffective. Often what will happen is it will trigger a Sell. A stock could go down temporarily, and then within days or weeks, come right back up. So, my back-tests have shown that stop losses do not work.
DS: Alright. And then there was another question about does Seeking Alpha and the Quant system have any price targets that we offer similar to what Wall Street analysts do?
SC: Yeah. No. We don’t use price targets. We basically think they’re very misleading. With Wall Street, they use those price targets to make stocks look interesting and show you the potential, how much they could go up. The problem is, in most cases, once it hits a price target, they’re always moving it to another price target. So, what we do is, we look at a company and compare it to other similar companies.
So, we need to look at a company and its valuation framework and its growth framework and its profitability and where it stands versus other stocks in the sector, and that helps us determine if a company is a Buy or not. We don’t really believe in price targets. They’re used by Wall Street firms, but they, I believe, are very misleading because if a company does well or the whole market does well, companies will hit their price targets. And if they’re not hitting their price target, that means there’s something wrong with the company.
DS: Alright. Steve, there’s a question that came in here that I feel like we have to ask you because we always talk about transparency. We’re fully transparent on our side. And the question came from Tom says, how is the Alpha Picks performance year-to-date? Do you feel comfortable right now sharing that? Because I think we should.
SC: Alright. Let’s go to our platform, and we will actually click on Alpha Picks.
DS: Got to get past all those portfolios.
SC: You’re going to see a couple of names here, but remember, you have to know when to get out of these names. So, we’re going to give a little bit away here.
DS: That’s alright.
SC: So, here’s the out performance.
DS: Get two new picks …
SC: And this – what I’ve actually done is, I’ve brought us to the Alpha Picks platform. So, this is a separate platform than Seeking Alpha Premium. And when you come to the platform and you click on performance, you could actually see since inception at this point, it’s up 285%. It did hit, it was up about 300%, but many of the stocks have come off as the market is rotating to the safe haven asset classes. So, since inception, up 285% versus the S&P up 79%.
If we look year-to-date, you could see Alpha Picks is up 5.28% versus the S&P, which is down almost 1%. Not quite. Feel like every day, the S&P is going down, a little bit more. So, it’s been having a tough period lately, but Alpha Picks is holding up.
My anticipation is if the market does continue in a drawdown, and by example, that CNN Fear & Greed Index goes deeper into extreme fear you will see a sell-off in many of the Alpha Picks stocks and the PRO Quant Portfolio stocks because these are stocks that have good fundamentals, and people need to raise cash. So, they’re going to sell stocks where they’ve made money that have done well.
So, really, I’ve seen this many, many – going back to as long as I’ve been doing Quant, I’ve been in the, marketplace for over 30 years. And, again, whenever you have a market that is driven by sentiment and fear, people will sell the companies that are good companies that have strong fundamentals. Their stocks come off sharply. Those are typically the ones that have already performed well. So, people will want to take profits and sell those stocks, or they just need to raise cash, and that’s where there are opportunities.
And I would not be surprised to see many of these stocks, and you could even see with the three companies that we recommended recently, it’s in this phase of the market pullback where we’re rotating to utilities and consumer staples and cash. Many of these stocks that we’ve recommended recently have come off pretty sharply versus the S&P 500, but what we’ll find is, sentiment fades, fear fades, and returns to fundamentals. So that presents great buying opportunities. We do tend to recommend stocks because they are mispriced, and the market is not valuing them correctly. So that’s, in general, the reason why we recommend these stocks and bring them forward, but when you’re in a drawdown like this, they tend to get even more oversold. And, boy, does it present a great opportunity when the market returns back to fundamentals.
DS: Well said.
SC: So, that’s a year-to-date performance for the last year. Alpha Picks is up 73% versus the S&P up 21%. And over the last six months, it’s up 12% versus the S&P up 2.84%. I would say Daniel, the last four weeks is a marketplace that has been driven mostly by fear. So, over the last month, you could see Alpha Picks has underperformed over the last four weeks. Just like I said, it would happen. And I would anticipate if the drawdown in the market gets deeper, that these stocks will sell-off even more, and it presents a great opportunity. Because if you Buy them when they’re weak like this and then you Hold them a year, you will see returns like this later on.
DS: Well said. Well said. Before we wrap up here because we’re getting to the top of the hour, there’s a lot of questions here today that we were not able to get to. I want to highly encourage everybody, go follow Steven Cress here on Seeking Alpha. He has his own profile. His team is constantly putting out different types of articles about ideas, about what’s going on in the markets and keeping everybody up to date. And you can, if you didn’t get your question answered, send him a message through that. You can always reach out, and he can get to you later. Steve, there was a funny question that came in. Just want to mention real quick.
Adam wants to know why we stick you out in the hallway for these webinars, and you’re not allowed in the studio. We really…
SC: I’m very frugal, so I don’t want to waste the space of an office, so I just stay in the hallway …
DS: Put all the money into the Quant system. It’s fine. That’s why we run it every morning before the stock market opens. Oh, alright. One last question, actually. Alpha Picks, there was a question. Is it equity only in there for the pick of the names?
SC: That is correct. For both Alpha Picks and for PQP, these are stocks. We do not invest in ETFs. So, yeah, just stocks. It’s, all about stocks for us. So I will say, we actually do have ratings on ETFs. So, if you do own ETFs, you will see there are Quant Factor Grades on ETFs and Quant directional recommendations, but for the purpose of these two products, it’s all about stocks.
DS: Exactly right. Alright, everyone. We’re going to go ahead and wrap it up here. Thanks for hanging out with us for this hour. If you’re catching the replay, thank you for checking that out as well. Click on the links beneath the video if you’re interested in Alpha Picks, PRO Quant Portfolio. Follow Steve for more ideas and information like this, and we’re going to do some more webinars in the months to come, obviously, especially if this oil volatility stays high, as macroeconomic events unfold and what’s going on in the interest rate world because that’s going to affect our portfolios. We want to be here to provide value for you as well.
So, everyone, Steve, thank you for the time as always. Everyone, have a great rest of your week, and, stay safe out there. We’ll see you in the next webinar.
SC: Yeah. Good luck with the markets everyone.