Pockets of Momentum Endure as Traders Lean into Risk

We have mixed action to start the week, with the Roundhill Magnificent Seven ETF (MAGS) lagging while the iShares Russell 2000 ETF (IWM) and the VanEck Semiconductor ETF (SMH) are leading. Breadth is only running about 45%, but the S&P 500 is in positive territory.

Dip buyers showed up immediately at the open, and there is a good list of stocks moving up more than 10%. There are over 200 new highs to start the day. The message here is that pockets of speculative action are continuing, and traders are looking to add more risk. They are staying selective and are focused on chasing the best relative strength.

While overall market conditions look good, I’ve been increasing my cash levels and am now close to 50% cash. I’m not bearish, but I’m taking some profits into strength and am keeping stops very tight. Since I’m not rushing to redeploy sale proceeds, my cash levels are increasing. I’m not at all worried about being underinvested, as I expect trading opportunities to develop.

Building a Position in The Oncology Institute

An example of a stock that I’m watching is The Oncology Institute Inc. (TOI). It posted earnings last week and the numbers and the conference call were quite good, but it is a small stock and there isn’t much coverage. It isn’t doing much right now, and I want to slowly accumulate it.

The Oncology Institute treats cancer patients in outpatient clinics rather than through the traditional hospital systems. It operates 80-plus clinics across five states, with the largest concentration in California, and has developed an affiliated network that totals roughly 155 additional clinics.

The business has three revenue streams. Patient Services covers fee-for-service oncology care, where TOI gets paid per visit and per procedure in the traditional way. Specialty Pharmacy dispenses oncology drugs to TOI’s patients, capturing prescription revenue.

The Capitated Contracts system is where there is significant upside. Health insurance plans pay TOI a fixed monthly fee for each Medicare Advantage member, and TOI takes financial responsibility for managing all of that member’s cancer care. If TOI delivers care efficiently, the margin is substantial. If costs run above expectations, TOI eats the difference.

In its most recent quarter, TOI reported that revenue grew 41% to $147.4 million. Adjusted EBITDA loss narrowed to $2.4 million from $5.1 million. The headline numbers were fine, but the structural issues underneath are very promising and are why I am adding to my position.

Florida operations reached profitability for the first time, validating that the model can work outside of the legacy California base. This is called a delegated capitation model. The model only works when the network is large enough to handle large volume and the clinical pathways are controlled enough to keep medical costs predictable. California has worked for years, and Florida is the first state outside California where the math now works at scale. Florida is set to scale to roughly 200,000 Medicare Advantage lives across 25 counties in Q3, more than doubling the existing levels.

Most importantly, free cash flow guidance moved from a midpoint of a loss of $5 million to a midpoint gain of $10 million. That is a $15 million positive swing. Management did not change the EBITDA guidance, which tells us the improvement is coming from working capital and capex discipline rather than operating leverage.

A third item did not make headlines but probably matters most. Affiliated and network clinics nearly doubled to 155 from 81 in 12 months. That is capacity being built ahead of demand, not chasing it. Management is preparing for expansion that has not yet been announced.

The good report coupled with the fast growth looks very promising, and since the stock is very much under the radar, I’m comfortable building the position while waiting for the market to discover it. The chart is good with support around $3.75. I’m not expecting a fast move, but I want to position for positive progress and the next earnings report. While others are chasing the hot relative strength, I’m looking at a slower moving value play in this case.

My Strategy

There are many other smaller stocks that recently reported that are being ignored by the market. They may languish for a while, but these are the names that should benefit when we see more focus on stock picking. I expect stock picking to kick in when rotational action hits the market. We still have a lot of momentum chasing, but it is late to the game there, and I’m looking for the next phase of market action.

At the time of publication, DePorre was long TOI.