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Methodology
Let's start with the process. The aim here is to build a selection that is both high-performing and resilient. To achieve this, I rely on Evidence Based Investing, i.e. scientific research that has proven the relevance of certain investment strategies over time. This highly rational investment process has highlighted the relevance of certain investment factors.
The Momentum Picks selection is based primarily on two of these factors: Quality and Momentum.
- Momentum: In the classic sense of the term, momentum is an investment approach that favors stocks that have been on an upward trend over the past six and twelve months. At MarketScreener, momentum includes not only data on the stock's positive trend over the short (3 months), medium (6 months) and longer term (12 months), a so-called "technical" momentum, but also analysts' revisions to net earnings per share and sales over the short and long term, weighted by the number of shares in issue. This is more "fundamental" momentum, based on the assumption that analysts are rather conservative in their revisions.
- Quality: The quality factor favors companies with solid fundamentals, i.e. good profitability, high return on equity, healthy balance sheet, good credit rating and good credit rating, a healthy balance sheet, low margin volatility, a good track record of earnings releases and good visibility on future results.
Another advantage of the Momentum Picks selection is that every quarter, we reset our thinking. I start from scratch to create the best possible selection. This constant rethinking helps avoid clinging to old ideas that might not work as well. After all, "when you can't go back, you only have to worry about the best way forward" (Paulo Coelho). Having been an enthusiast of behavioral psychology since my university days, I place great emphasis on integrating mental models into my management process, enabling me to avoid being led astray by my cognitive biases as much as possible.
The selection is designed to generate the best possible risk/reward given its limited composition. However, a selection of just five stocks does not constitute a sufficiently diversified portfolio. Rather, Momentum Picks should be seen as a complement to an already diversified portfolio. In fact, I invite you to think critically about this selection and do your own research on these companies. While this section provides insights into both the process and the outcome of that process, remember that this is your investment decision.
Past performance analysis
In our previous selection, we chose AppLovin, Universal Health Services, Heico Corporation, Nu Holdings and Freshpet. All these stocks are in the green at the end of the quarter. A portfolio weighted equally on these five positions would have generated a return of 21.86% versus 5.53% for our benchmark, the S&P 500 index, over the third quarter of 2024 (from 06/30/2024 to 09/30/2024), i.e. an outperformance of 16.33%. At individual level, AppLovin gained +56.87% over the quarter, Universal Health Services +23.87%, Heico Corporation +16.96%, Nu Holdings +5.90% and Freshpet gained +5.70%.
I was positively surprised by the operating performances of these five companies. In fact, the latest quarterly results (detailed below) significantly exceeded analysts' consensus expectations, particularly on the bottom line.
The Momentum Picks selection , which began on December 31, 2021, achieved a cumulative performance of 101.96%, compared with 20.90% for our benchmark, the broad US S&P 500 index, i.e. an outperformance of +81.06% in 2 years and 9 months. The most assiduous readers of this column have thus doubled their capital in less than 3 years, and outperformed the S&P 500 by a factor of 5. To cite a few other indices, the Nasdaq-100 posted a cumulative performance of 22.92% over the same period, the MSCI World 15.32% and the Stoxx Europe 600 7.19%. What's more, Momentum Picks' performance does not include the payment of dividends to shareholders over the period, so actual performance is even higher than these figures.
"The most assiduous readers of this column have thus doubled their capital in less than 3 years and outperformed the S&P 500 by a factor of 5."
This performance surplus is due to three main parameters (two of which are controllable):
- The use of a time-tested strategy based on scientific research;
- Equal-weighted management that is pragmatic, impartial and free from emotional bias;
- A little luck.
Despite these very encouraging performances from our proven selection and management process, we must remain humble in the face of the market. I agree with François Rochon of Giverny Capital on the famous rule of three. One year out of three, the stock market will fall by at least 10%. One stock out of three will be a disappointment. One quarter out of three, the Momentum Picks selection will underperform the market. This is not a foregone conclusion, but rather an objective way of looking at stock market reality. There's always an element of chance. It's essential to be aware of this in order to prepare psychologically for the inevitable periods when Momentum Picks will underperform our benchmark.
Performance by quarter
Momentum Picks has outperformed its benchmark (S&P500) in 9 of the last 11 quarters. We can therefore observe a certain recurrence of performance in phases of market contraction as well as expansion.
Cumulative performance
The new selection
Let's take a closer look at the five US stocks selected for the fourth quarter of 2024 (October to December).
Momentum Picks Q4 2024 Equal Weighted Selection
As you can see, we're maintaining our previous five positions. Sometimes, doing nothing is the smartest thing to do. These five stocks still meet our quantitative and qualitative criteria. Both the publications and the outlook have been reassuring. Why change a winning team?
Let's start with one of my strongest convictions of 2024: AppLovin. Trees don't reach for the sky, but sometimes they come close. Such is the case with AppLovin, whose stock market performance is matched only by its operating performance. The stock is up 225% year-to-date, the best YTD 2024 performance of any US stock with a market capitalization of over $15 billion!
Palo Alto-based AppLovin Corporation is strategically positioned in the fast-growing mobile application ecosystem. The mobile applications market is in constant growth. According to market studies, the sector could reach a valuation of $674 billion by 2027. The company provides a software platform that matches advertiser demand with publisher supply through large-scale auctions at microsecond speeds. Its software platform is powered by its proprietary AI-powered AXON advertising engine. This is an advanced in-app bidding technology that optimizes the value of a publisher's ad inventory by organizing competitive auctions in real time.
They are also present in marketing solutions, connected TV and mobile games. The company's portfolio includes over 350 free-to-play mobile games, covering a variety of game genres. The company has demonstrated its ability to maintain high margins, with a gross margin of over 70% and an operating margin of 36.2%. This testifies to the effectiveness of its business model and operational management. Although the market has already priced in some of AppLovin's growth potential, the company continues to offer attractive upside potential over the medium-to-long term.
AppLovin's management team, led by founder Andrew Karam and CEO Adam Foroughi, has significant experience in the technology sector. AppLovin has announced its intention to re-evaluate its application portfolio, which could lead to divestments and increased focus on its software business. This could also lead to improved margins and a higher long-term valuation.
For the last quarter, the company reported 22.1% above expectations on EPS, which came in at $0.89 on August 7, 2024. AppLovin presents an attractive investment profile thanks to its attractive positioning in a growth sector, its advanced technology, and a resilient business model even in a cyclical sector like advertising. In my view, the digital advertising segment will be one of the first beneficiaries of advances in AI (and indeed already is).
They still have a long runway for growth, which Bank of America estimates at plus 20% a year until 2026. Margins are plethoric and to my taste underestimated by Wall Street. We can expect an EBITDA margin of 74% in the software segment this year. Even if the stock is overbought at the moment, it still validates my qualitative and quantitative criteria, and seems to me still undervalued relative to its peers, so why take it out?
Heico has also been a great success over the last two quarters. Heico Corporation rarely makes the headlines, unlike Nvidia or Novo Nordisk, but its track record is every bit as extraordinary as theirs. From a small supplier of spare parts for the aeronautics industry, Heico has become a major, well-established player in the aeronautics, aerospace and electronics industries.ronautics, aerospace and defense industries, and is also present in the medical, telecommunications and electronics sectors. Heico designs, produces and distributes niche products and services for airlines, overhaul shops and numerous small companies, as well as military agencies in the aerospace and defense sectors.Heico designs, produces and distributes niche products and services for airlines, overhaul shops and numerous small companies, as well as military defense and space agencies worldwide, in addition to manufacturers of medical, telecommunications and electronic equipment. In particular, it is the world's largest manufacturer of spare parts for FAA (Federal Aviation Administration) approved jet engines and aircraft components.
The company was founded in 1957 as a holding company, bringing together a number of subsidiaries. Heico operates through two main segments: the Flight Support Group (FSG) and the Electronic Technologies Group (ETG). The FSG, which accounts for around 50% of sales and 35% of operating income, specializes in the design and manufacture of spare parts for jet engines and other aircraft components. ETG generates 50% of sales and 65% of operating income, and focuses on the design and manufacture of critical subcomponents for military and space applications.
Heico represents an exceptional investment case, with compound annual sales growth of 15% over the past 33 years. It has generated a total shareholder return of 21.2% per annum over the same period. It has leveraged its expertise in reverse engineering and its ability to rapidly obtain Federal Aviation Administration (FAA) approval for its spare parts, giving it an edge over its competitors. The company has adopted an aggressive pricing strategy, offering spare parts at lower costs than original equipment manufacturers (OEMs), without the associated R&D costs, while maintaining a reasonable margin. As a result, Heico has become an indispensable supplier for most of its customers.
The Mendelson family, which owns the company, holds around 19% of the shares and favors a long-term vision. Heico also encourages employee participation in the company's capital, thus aligning the interests of all stakeholders. The aviation aftermarket is estimated to be worth $14 billion by 2026, with a compound annual growth rate of 4.7%. Heico also has the potential to expand geographically through bilateral aviation safety agreements (BASAs). The pandemic has highlighted Heico's resilience and could offer growth opportunities as airlines look to cut costs, potentially turning to alternative parts suppliers.
The latest third-quarter release confirms ambitions and the positive earnings trend: the company reported 5.44% above expectations on EPS, which came in at $0.97 on August 26, 2024. Heico therefore deserves to remain in the following selection. It represents a strategic investment in the aerospace and military sector, thanks to its robust business model, distinct competitive advantage, long-term corporate culture and significant growth potential.
Universal Health Services is the most defensive of the five stocks presented today. The company specializes in the ownership and management of healthcare centers. The group offers general and specialized surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, diagnostic care, coronary care, pediatrics, pharmacy and/or behavioral health services. The company is listed on the NYSE under the symbol UHS and is headquartered in King of Prussia, Pennsylvania. Acute hospital services account for 54.8% of its sales, while behavioral health services contribute 45.1%. The majority of its revenues come from the United States (94.67%), with a presence in the UK (5.33%).
Universal Health Services is positioned in a competitive market, but its track record of success over the last three decades and its reputation help it to position itself well in this market. UHS has demonstrated steady sales growth, with an increase of 6.8% per year over the last 10 years. The company's profitability is underlined by a gross margin of 39%, an operating margin of 8% and a net margin of 5% by 2023. The financial situation is borderline acceptable, with leverage (debt/EBITDA) of 2.75x in 2023. The company's management is experienced, with Marc Miller as CEO and founder Alan Miller playing an active role as a director. Good visibility on its activities and positive EPS revisions following good publications should continue to push the stock to new heights. The share price is close to all-time highs.
However, UHS fell at the end of the quarter (Friday September 27 and Monday September 30) after the company declared that the jury in a civil trial had awarded 360 million to three victims of sexual harassment by the former medical director of a Universal Health facility near Richmond, Virginia. In addition, the company has a good reputation when it comes to publications, often exceeding analysts' expectations. Last quarter, the company reported sales 1.11% above expectations and EPS 28.25% above consensus. Universal Health Services presents an attractive investment opportunity for those looking to get involved in the healthcare sector. With stable growth, good visibility and experienced management, Universal Health Services could be a relevant addition to a diversified portfolio.
Nu Holdings, listed on the NYSE in New York under the symbol NU, is a Brazilian company specializing in digital financial services. Founded in 2013, the company's mission is to revolutionize banking in Latin America by offering accessible, affordable and customer-centric financial solutions. Nubank offers a comprehensive range of financial products covering spending, saving, investing, borrowing and protection. The company operates mainly in Brazil, Mexico and Colombia, with a customer base of over 105 million people.
Nubank operates as a neobank without physical branches, using a cloud-based, mobile-focused platform. Key services include credit and debit cards offering instant payment solutions and personalized credit lines, interest-bearing savings accounts with complementary debit cards; investment products and services via the NuInvest platform; unsecured and secured loans, including personal and payday loans; and insurance, life insurance and funeral services via NuInsurance.
It's one of the world's largest digital banking platforms, serving over 105 million customers in Latin America. In Brazil, it covers 55% of the adult population. The company stands out for its customer-centric approach, advanced use of data science and fully digital model, enabling it to maintain low operating costs and high customer acquisition efficiency. Since its launch, Nubank has experienced exponential growth. In just four years, the company's sales have increased almost 12-fold, with a compound annual growth rate (CAGR) of 89%. In 2023, Nubank generated sales of USD 8.03 billion, up from USD 4.79 billion in 2022. Analysts forecast continued growth for Nubank, with estimated sales of USD 11.65 billion in 2024. The company aims to increase its average revenue per active customer (ARPAC) and broaden its customer base, in particular by targeting the 77.1 million unbanked adults in Brazil, Mexico and Colombia.
For the last quarter, the company reported sales 1.4% above expectations and EPS 12.46% above consensus. Nubank plans to continue expanding in Mexico and Colombia, while increasing its market share in Brazil. The company also aims to launch new products and services based on technologies such as real-time payments, open banking and AI. Operating margin reached 19.2% in 2023, and net margin stood at 12.8%. The company also has a return on equity (ROE) of 18.2%. Although Nubank does not report free cash flow (FCF) due to the nature of its banking operations, the company generates substantial interest income and maintains a strong cash position. A look at its balance sheet reveals $6 billion in cash and cash equivalents. The company has a loan-to-deposit ratio of 40%, well below that of its peers, and an asset-to-equity ratio of 6, favorable compared with the industry norm of 12 or more. Nu Holdings is therefore well positioned to repay its debts and finance future growth.
David Vélez, co-founder and CEO, is a visionary leader with a solid background in finance and entrepreneurship. Cristina Junqueira, co-founder and Director of Growth, and Edward Wible, co-founder and former CTO, complete the management team. The continued involvement of the co-founders in the day-to-day running of the company is an extremely positive sign. David Vélez holds a 20% stake in Nubank, while Cristina Junqueira holds 2.5%, which ensures a certain alignment with the shareholders. The company has implemented a share-based compensation structure to align management interests with those of shareholders, with around 95% of employees owning Nubank shares.
Nu Holdings trades at 34 times estimated earnings for 2024, which may seem high compared with its traditional peers. However, this premium is justified by rapid growth prospects, an innovative business model and rapid market share gains. The company has a vast untapped market in Latin America, with millions of unbanked adults and low credit card penetration rates. Nu Holdings thus continues to present an interesting opportunity for our selection of US-listed stocks.
Freshpet is a specialist in fresh food products for pets. Founded by Cathal Walsh and Scott Morris, the company stands out for its nutritional philosophy based on fresh, meat-based food with minimal processing. Products include dog and cat food, all made without preservatives or additives. The American company offers its products under the eponymous brand name and sells them via a network of branded refrigerators, the "Freshpet Fridges", installed in various points of sale. These fridges can be found in grocery stores, mass merchandisers, clubs, specialized pet stores, natural food stores and digital platforms.
The company sells mainly in the USA and Canada, with a marginal presence in Europe, although this is a future growth lever to be exploited. Freshpet is a leader in the fresh pet food segment, with a 96% market share in the new fresh and frozen cat and dog food segment. Freshpet has enjoyed resounding success in recent years. Sales have risen from $87 million in 2014 to $767 million in 2023, representing almost 30% CAGR over the past decade. This growth has been underpinned by a steady increase in demand for fresh, natural pet food, with owners increasingly concerned about animal welfare. Analysts anticipate strong growth in business volumes over the coming years.
For 2024, the company is forecasting sales of $969 million, an increase of 26% on 2023. The company also achieved its first profitable quarter at the end of 2023 (net income of $15 million in Q4 2023). For the full year 2024, Freshpet forecasts adjusted EBITDA of at least 120 million. Freshpet has shown a significant improvement in profitability in recent quarters. This improvement is due to better management of production costs and a reduction in quality costs. Freshpet generated operating cash flow of USD 42.41 million in the second quarter of 2024, compared with just USD 13.51 million in the second quarter of 2023. The company expects to be free cash flow (FCF) positive by 2026.
The company has shown a significant improvement in its cash position, enabling it to support its long-term capital requirements. With nearly 8 years at Freshpet, William Cyr (CEO) has extensive experience in the consumer goods industry. Freshpet's Board of Directors is made up of experienced members, including David West, Daryl Brewster and Joseph Scalzo, who bring valuable expertise in strategy and governance.
At its current price of USD 135, Freshpet is trading at a very high earnings multiple (195 times its anticipated earnings per share for the current financial year). However, profitability is very recent, and margins will surely continue to rise, not necessarily in the short term (by 2024) but most certainly over the following three years. Although this multiple may seem high, it also reflects the company's high growth expectations, which could double sales and triple net income in the next two years. The company pays 6.9 its EV/Sales, a slightly more reasonable follow-up ratio. It's a high-growth company with recurring revenues has shown impressive revenue and earnings growth, with prospects for continued growth. With a market share of just 3% in the overall dog/cat food market (not just fresh), Freshpet has significant growth potential. At the current share price, the stock offers slight upside potential, despite its high initial price.
We'll be back in three months to debrief this selection.
Find previous selections here :
- Momentum Picks Q3 2024 - 5 stocks for summer
- Momentum Picks Q2 2024 - 5 stocks for spring
- Momentum Picks Q1 2024 - 5 stocks for winter
- Momentum Picks Q4 2023 - 5 stocks for autumn
- Momentum Picks Q3 2023 - 5 stocks for summer
- Momentum Picks Q2 2023 - 5 stocks for spring
Disclaimer : The information, analyses, charts, figures, opinions and comments provided in this article are intended for investors with the knowledge and experience required to understand and appreciate the information developed. This information is provided for information purposes only, and does not represent an investment obligation or an offer or solicitation to buy or sell financial products or services. It does not constitute investment advice. The investor is solely responsible for the use of the information provided, without recourse against MarketScreener or the author of this article, who are not liable in the event of error, omission, inappropriate investment or unfavorable market trends. Performance figures do not include brokerage fees. Investing in the stock market is risky. You may incur losses. Past performance is not a guide to future performance, is not constant over time and is not a guarantee of future performance or capital.
