Stocks Under $10 Weekly Summary

The Stocks Under $10 Portfolio Last Week

The rebound in the stock market continued last week as we entered the month of June, the home stretch for the second quarter. Despite the turmoil associated with the continued protests in the U.S. that are presenting a fresh headwind to retailers and restaurant companies, the better-than-feared economic data of the week paired with a de-escalation in U.S.-China tensions at least was the cause for the market’s gains.

The additional across-the-board, upward move in the U.S. equity indices has them all up more than 23% quarter to date as of Friday’s market close, leaving both the S&P 500 and Dow Jones Industrial Average within striking distance of becoming breakeven on a year-to-date basis. The Nasdaq Composite Index already crossed that threshold and is flirting with a new all-time high, while the small-cap laden Russell 2000 is still down almost 10% year to date.

Recapping the week’s economic data, the May ISM Manufacturing Index ticked higher compared to April, which along with the month-over-month improvement in Orders, Export Orders and Employment, helped convert investor “hopium” for the economic reopening into firmer expectations. The same was true with the May Non-Manufacturing ISM Index, which also revealed a month-over-month improvement in the headline index but also Business Activity, New Orders and Exports.

We also saw a pick-up in Auto & Truck sales for May vs. April and ADP’s May Employment Change Report revealed a far better than feared 2.76 million jobs lost during the month vs. the expected 9.0 million loss and the 19.6 million lost in April. Closing out the week, the May Employment Report echoed those findings and came in better than expected on almost every metric. Per the May Employment Report, 2.5 million jobs were added during the month compared to the expected decline of 8.5 million and the 20.7 million lost during April. This led the May Unemployment Rate to come in at 13.3%, down from April’s 14.7% and far better than the 19%-20% that had been expected for May.

The above data, along with the continued phased reopening of the U.S. and other economies across the globe has given rise to a profound shift in investor sentiment. Closing out this week, the CNN Money Fear & Greed Index reached 66 (Greed), up from 52 (Neutral) a week ago and 41 (Fear) a month ago.

To be blunt, even though the market has surged back in the last several weeks, we continue to hear reports about companies trimming back worker hours while others push back timetables for workers to return to offices. That, in addition to the more than 40 million fresh jobless claims in recent weeks, translates into a near-term headwind. From a risk perspective, it likely means the stock market is getting a little out over its ski tips. From a technical perspective, the market’s sharp claw back has it in overbought territory. While we are optimistic about prospects for the economy to rebound further in the coming months, we could see the stock market enter into a period of digesting its rebound.

In our view, the proof in the economic reopening pudding will be found in the upcoming June-quarter earnings season as investors assess both second-half EPS prospects for 2020 and those for all of 2021. As of today, consensus expectations call for less than 1% EPS growth for the S&P 500 over the 2019-2021 period. Granted we don’t “buy the market,” although we do see the market moving meaningfully higher from here, but we will likely need to see EPS expectations recover as well. Again, that makes the upcoming June-quarter earnings season important for where the stock market will head in the second half of 2020.

It was another positive week for the Stocks Under $10 portfolio as 13 of the 15 positions finished higher. As the stock market rebounded over the last few weeks, there has been a meaningful lift in a number of our holdings. Reflecting that, we took the opportunity last week to book some of those double-digit, and in some cases triple-digit, gains.

We started off the week trimming ADT (ADT) and Digital Turbine (APPS) . And following a solid May delivery vehicle report, we used the surge in Nio (NIO) to our advantage. Late in the week we pruned our Ovintiv (OVV) position, locking in big gains, and also cleared the decks of our Macy’s (M) and Digital Turbine (APPS) shares, which resulted in hefty double-digit profits.

Earlier today we trimmed our holdings in MobileIron (MOBL) , following a more than 35% climb quarter to date, and used the proceeds to plant some additional seeds in Orion Energy Systems (OESX) , which reduced our cost basis. We expect to harvest some of those seeds in the coming 12 months.

Exiting the week, we had 13 active positions in the portfolio. Given our comments above, we remain focused on identifying companies poised to deliver superior EPS growth in the coming quarters. As we do this, we will continue to mindful of other potential market disruptions, including the current protests and the festering U.S.-China relationship.

The Stock Market This Week

Coming off last week’s bonanza of economic data that added legs to the market’s rebound, this week brings a far shorter list of data and earnings to examine. Below is a closer look at the economic data scheduled:

Tuesday, June 9: May NFIB Small Business Optimism Index; April JOLTS Job Openings report.

Wednesday, June 10: Weekly MBA Mortgage Applications Index; May Consumer Price Index; EIA Oil Inventories; FOMC Rate Decision.

Thursday, June 11: Weekly Jobless Claims; May Producer Price Index; Weekly EIA Natural Gas Inventories.

Friday, June 12: June University of Michigan Consumer Sentiment (Preliminary).

Before too long the June-quarter earnings season will be upon us. Amid the summer heat and the reopening economy, we still have a number of companies reporting their quarterly results next week, though. Given the timing of their quarter ends, we will use these forthcoming reports to assess the speed of the economic reopening, potential supply chain disruptions as well as the degree to which consumers are opening their wallets. In particular, our focus will be on the monthly cadence of their quarter’s progression as well as June-facing comments.

Monday, June 8: Thor Industries (THO) ; Calavo Growers (CVGW) .

Tuesday, June 9: Brown-Forman (BF.B: NYSE); HD Supply Holdings (HDS) ; AMC Entertainment (AMC) ; Chewy (CHWY) ; Five Below (FIVE) .

Wednesday, June 10: Red Robin Gourmet Burgers (RRGB) ; United Natural Foods (UNFI) .

Thursday, June 11: Adobe (ADBE) ; Dave & Buster’s (PLAY) ; Lululemon Athletica (LULU) .

The Stocks Under $10 Portfolio

Below is a rundown of our current positions. Figures in parentheses are each stock's Friday closing price and percentage weighting in the model portfolio. (For the most up-to-date portfolio results, please click here.)

ONES

Farfetch Ltd. (FTCH:NYSE; $14.03; 3.01%)

Shares of this digital luxury retailing platform rose last week, adding to their impressive quarter-to-date move that topped 77% as of Fridays’ market close. Last week we shared our view after reviewing the company’s 2019 20-F filing with the SEC, which can be found here. Recently, the company delivered mixed March-quarter results that beat on the revenue line but missed on EPS. Revenue for the quarter rose 90.4% year over year led by gross merchandise value (GMV), up 46%, to nearly $611 million. Overall traffic grew 41%, reflecting the acceleration of the shift of luxury online and GMV from new customers grew faster than GMV from existing customers for the first time in three years amid a 27% year-over-year increase in active customers across the Farfetch marketplace. We see the quarter’s results confirming our thesis that surrounds the shift to luxury shopping to digital platforms, and we see the pandemic as only accelerating that shift.

Price Target: $16.

MobileIron Inc. (MOBL:NYSE; $5.18; 4.14%)

Shares of cybersecurity company MobileIron surged more than 14% last week, which led us to take advantage of recent gains earlier today. We see a multi-year tailwind for cybersecurity and data privacy solutions given the continued global increase in what we call the “digital lifestyle.” Goosing that demand picture, Covid-19 is leading to a pronounced increase in the number of malicious attacks and phishing schemes across the globe by bad actors due in part to the surge in work from home. A recent report by the World Economic Forum (WEF), Marsh & McLennan and Zurich Insurance Group reveals executives are concerned over increased cyber-attacks arising from a shift to remote working. We see MobileIron as well positioned to benefit from this growing pain point.

Price Target: $6.00

Nio Inc. (NIO:NYSE; $3.98; 2.68%)

Last week was a barn burner for shares of this Chinese electric vehicle company. It included favorable May Chinese vehicle industry sales data, upbeat comments on NIO from Goldman Sachs and better-than-expected May deliveries for the company. Following those events and the subsequent share gains, we once again rang the register and trimmed back our exposure in addition to boosting our price target to $6.25 from $4.50. We see the rebounding China economy, Chinese electric vehicles incentives and initial vehicle shipments of Nio’s latest electric vehicle driving favorable second half of the year comparisons vs. both the first half of 2020 and the second half of 2019.

Price Target: $6.25.

Orion Energy Systems Inc. (OESX:Nasdaq; $4.14; 3.14%)

Last week shares of Orion Energy slumped following the company’s March-quarter results that missed expectations, which we had expected and which kept us on the sidelines in recent weeks. Despite that miss, the company’s prospects for its energy efficient and environment friendly LED lighting systems among big-box retailers remains bright thanks in part to new customer wins that should matriculate into revenue and profits in the coming quarters. Earlier today, we used that pullback to add to our OESX position while also improving our cost basis.

Price Target: $6.

RF Industries (RFIL:Nasdaq; $5.69; 3.56%)

Shares of this diamond-in-the-rough mobile network equipment inched higher last week adding to their impressive quarter-to-date gains. While we see the pandemic leading to incremental capacity additions for existing mobile networks, we recognize that during the first half of the year RF is likely to see supply chain disruptions. Adding credence to our longer-term view, Fortune Business Insights’ global wireless infrastructure market forecast is for 9.2% compound annual growth between 2019 and 2026 to roughly $250 billion from $121.8 billion. This includes not only the buildout of 5G networks but also incremental 4G capacity additions. When RF Industries reports its quarterly results this Thursday (June 11), we do not expect it to share a 2020 forecast, but we do expect management will paint a favorable multi-year picture.

Price Target: $8.

USA Technologies (USAT:Nasdaq; $7.00; 3.24%)

Shares of this mobile payment technology company started June on a down note, but that only modestly impacted its quarter to date gain of more than 50%. Our long-term thesis has centered on the adoption of mobile payments, and we only see that accelerating coming out of the pandemic as consumers adopt contactless payments. As the U.S. economy continues to reopen, we expect we will see a similar recovery in the company’s transaction-based business.

Price Target: $10.

TWOS

ADT Inc. (ADT:NYSE; $8.37; 1.99%)

Last week we took advantage of the quarter-to-date surge in ADT shares to ring the register, but even so ADT continued to power ahead rising another 18%. As of last Friday’s close, ADT shares are up more than 90% quarter to date. The Fed’s pandemic monetary stimulus efforts have led mortgage rates lower vs. a year ago, and we are hearing of an improving housing market. Given the meaningful exposure of ADT’s business to the housing market, the company’s subscription business model could see some stronger than currently expected demand lift in the coming months. As such, we’re inclined to keep some exposure to the shares in the active portfolio. However, with the stock well in over bought territory we could see ADT as a source of funds near-term.

Price Target: $7.

Antares Pharma (ATRS:Nasdaq; $3.12; 0.92%)

This name rallied nicely last week after trading in a wide trading range over the past month. The boost that did not come with Tuesday's presentation at the Jefferies Virtual Healthcare Conference but later in the week. Away from that, there has been no company-specific news in quite a while. This stock has been trading with small-caps in general.

Price Target: $5.25.

Durect Corporation (DRRX:Nasdaq; $2.41; 1.48%)

This name managed a smallish gain for the week, and actually struggled a bit after presenting at the Jefferies Virtual Healthcare Conference on Wednesday morning, June 3. It could be setting up for a portfolio downgrade. More to follow. Our position remains small, and the stock is still rated a two for now.

Price Target: $4.

Energy Recovery (ERII:Nasdaq; $8.95; 1.33%)

This stock traded sharply higher last week, late in the week, particularly. Oil ran. Smaller-cap stocks ran. Hopes for economic growth improved. There has been no company-specific news since the naming of Robert Mao to the permanent twin posts of president and CEO. Mao had already been serving in these positions on an interim basis. Water treatment supports the company, and this business could obviously still be impacted by the global pandemic as national budgets come under further strain.

Price Target: $13.

Nokia Corp. (NOK:NYSE; $4.46; 3.52%)

Shares of this mobile infrastructure and IP licensing jumped nearly 13% last week, bringing their quarter-to-date gain to more than 40%. While the first half of 2020 will likely see slower than initially expected 5G network builds and activations, all evidence points to a pickup in that activity during the second half of the year. As U.S. states and countries in Europe start to reopen, we expect improving construction data for these networks alongside incremental existing network capacity additions stemming from the pandemic. As those figures roll in, we anticipate investors will become increasingly comfortable with Nokia’s revised guidance that still points to a sizable pickup in the second half of the year. We will look to revisit our Two rating and possibly our price target as those confirmation points come to light.

Price Target: $5.

Ovintiv (OVV:NYSE; $7.69; 4.84%)

These shares absolutely roared for the week, and even louder on Friday. That's why we took some profits (again) in order to keep the allocation close to 4%. We said that we would see where the week took us. That was a good week. Management has done a good job of handling a tough situation. This for us, is a trader. That's our plan.

Price Target: Under Review

THREES

Pareteum Corp. (TEUM:Nasdaq; $0.57; 0.94%)

Even these shares, the dog of our portfolio, managed to get a lift last week. A matter of a rising tides lifting all boats? Perhaps. The company did get some good news the prior week when its requested "stay" of a pending de-listing from Nasdaq Capital Markets was granted in the form of an extension, but only pending a formal decision by the panel. In other words, last week was better than that. Still not enough of a boost to peel off a few more shares, in our opinion. This one remains a "working Three."

Price Target: None.

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