Actionable Stock Ideas -AlphaRank Top Stocks for April

April 14, 2024 — Monetary policy has been at the top of investors’ minds this year, as the Fed’s much-expected rate cutting cycle seems to be slipping away, or at least materially delayed.

Data-driven central bankers are keenly focused on inflation and jobs data, both of which are coming in hot and well above expectations, particularly in the U.S. The fact of the matter is that inflation has flatlined at 3.5% for the past year and is showing no sign of slowing down in the near term.

Source: Bloomberg

An inflation rate well above target, with a job market conducive to maximum employment, is hardly an environment supportive of an aggressive interest rate cutting cycle. In fact, with U.S. inflation stalling at 3.5% and a 3.8% unemployment rate, investors should begin to consider the potential scenario for a rate hike, let alone a rapid succession of cuts in the benchmark rate.

Fiscal spending dynamics support inflation staying elevated and U.S. economic growth persisting. As the Federal Reserve has tightened monetary policy in order to cool growth and stem rising prices, government fiscal spending has remained mired in red ink. Despite no hints of a near-term recession in the U.S., the budget deficit remains at an “emergency level” of spending at 6.4% of GDP. As the U.S. central bank tries to remove fuel from the economy via monetary policy, government fiscal policy via massive excessive spending and enormous deficits continues to throw fuel on the fire, seemingly negating the Fed’s best efforts to reduce inflation.

Source: Bloomberg

In any event, it is clear that inflation will be more persistent than both central bankers and market prognosticators forecasted, meaning we are in a higher for longer interest rate regime with the potential for no rate cuts in 2024. For capital allocators, the current economic environment is supportive of floating-rate investment strategies (private credit, leveraged loans) and cash-plus liquid alternatives (long-short equity, arbitrage, managed futures). Stocks and bonds may struggle, given the persistence of a negative equity risk premium along with a negative bond risk premium, with rate cut hopes rapidly fading.

With this outlook in mind, long-short equity stands out as an allocation with structural tailwinds. Ergo, to support long-short equity investors, we highlight one top-decile stock expected to outperform and one bottom-decile stock expected to underperform in this month’s AlphaRank Top Stocks.

OUTPERFORM: Suncor Energy (TSX: SU), a significant player in the Canadian energy sector, is a stock expected to outperform for several reasons. Suncor is trading at a discount relative to its cash flows. With a free cash flow yield of 16%, it is undervalued compared to its peers in the energy sector. The company has actively returned capital to shareholders through share buybacks and dividends, indicating confidence from management in the company’s valuation and a commitment to enhancing shareholder value. With a return on capital of nearly 25% and earnings estimates that are rapidly increasing, we expect the stock to continue to outperform. Suncor Energy has an AlphaRank score of 97.7, putting it in the top 10 Canadian stocks. Disclosure: the Accelerate Canadian Long Short Equity Fund is long SU shares.

UNDERPERFORM: SolarEdge Technologies Inc. (NASDAQ: SEDG) has been facing several challenges that might make it a candidate for a short position. The company, known for its smart energy technology, reported a significant decline in revenue and net income for Q3 2023 compared to the previous year and the preceding quarter. Specifically, its revenue dropped by 27% from the previous quarter and 13% year over year, while the net income turned into a substantial net loss compared to profits in prior periods. Moreover, SolarEdge’s financial performance has been impacted by high inventory levels and weak guidance for future earnings, suggesting potential ongoing challenges in its operations. This situation is exacerbated by a slow market and high inventory accumulation, which is expected to continue affecting the company’s performance in upcoming quarters​. In addition, a substantial recent quarterly earnings miss, combined with deeply negative free cash flow and a high short interest, indicate the shares can be expected to continue to underperform. Disclosure: the Accelerate Absolute Return Fund (TSX: HDGE) is short SEDG shares.

The AlphaRank Top and Bottom stock portfolios exhibited mixed performance last month:

• In Canada, the top decile stock portfolio underperformed the TSX 60 by 200bps, while the bottom decile portfolio outperformed by more than 600bps. While short term performance was poor, over the past 5 years, the top decile portfolio is up approximately 130% while the bottom decile portfolio has lost nearly -20%.
• In the U.S., the AlphaRank portfolios “behaved” more appropriately, with the top decile equities outperforming the S&P 500 by 140bps and the bottom decile stocks underperforming by 120bps. Over the past 5 years, the top decile-ranked stock portfolio is up 125% while the bottom-ranked portfolio has fallen -25%.

AlphaRank Top Stocks represents Accelerate’s predictive equity ranking powered by proven drivers of return. Stocks with the highest AlphaRank are expected to outperform, while stocks with the lowest AlphaRank are anticipated to underperform. AlphaRank assigns a numeric value to each security from zero (bottom-ranked) to 100 (top-ranked) based on selected predictive factors. All Canadian and U.S. stocks priced above $1.50 per share and $100 million in market capitalization are evaluated. In both the Accelerate Absolute Return Fund (TSX: HDGE) and the Accelerate Canadian Long Short Equity Fund (TSX: ATSX), Accelerate funds may be long many top-ranked stocks and short many bottom-ranked stocks. See AccelerateShares.com for more information.