As foreshadowed in yesterday's weekly commentary, I wanted to sell another one of our positions and rotate that available cash to two new positions, states Steve Reitmeister of Reitmeister Total Return.
That leads to the following trades:
- Sell all shares of Electronic Arts (EA)
- Buy 8% allocation in EMCOR Group (EME)
- Buy 7.5% allocation in Gates Industrial (GTES)
Why Sell EA? Clear underperformer since being added and just wants to make way for picks with even more impressive POWR Ratings...and thus a greater likelihood of upside potential.
Why Buy EME? This has all the right bells going off in my head. That's because this leading mechanical, electrical and energy infrastructure firm has been displaying tremendous earnings momentum ever since Covid subsided. With that shares have surged nearly four times in four years and yet all signs point to even more gains ahead.
The POWR Ratings echoes these statements as it is the 15th highest ranked stock in our universe of over 5,300 companies. That may be hard to see with only one component rating in A territory (Sentiment). However, when you appreciate there is NO WEAKNESS in the ratings with all components in the top 30%...that total of goodness makes it very impressive on a fundamental basis.
Given their historical valuations, I see shares easily leaping over $250 in the coming year with $300 being a real possibility if they keep up their beat and raise traditions in the quarter ahead. That is why I am excited to pick up shares this morning under $215.
Why Buy GTES? Smaller stocks are set to outperform in the year ahead because of their underperformance in 2023 (and the past four years... it's time for small stocks to shine). The same goes for industries that did not have the best year either. This lines up these groups for outperformance in the year ahead having my sights fall squarely on Gates Industrial.
This has appeared on a number of my screens in the past and just missed the cut-off from being added when I loaded us up with four smaller stocks on 12/7. Yes, shares are up since then but plenty of reason to believe in still attractive upside ahead.
That's because there is a turnaround unfolding as proven by their Q3 earnings announcement pointing to an improvement in earnings estimates ahead. On top of that, you have the lower rate environment that should be of continuing benefit to the entire industrial space which often relies upon borrowing for both business expansion and the sale of products to customers.
As always for new RTR picks, the POWR Ratings look stellar for this stock in the top 2.5% of all stocks covered. Beyond the A overall rating that implies, this stock shows strength in other core areas like Quality in the top 10%.
On the value front the B rating seems tame...but mathematically speaking it was right on the border of A territory. Meaning that on the 31 factors of Value we measure it is in the top 6% (top 5% is what constitutes an A rating).
Gladly Wall Street analysts agree with this value proposition leading the Five-Star analyst at Citi to have a $17 target. Even better is the Robert Baird analyst with a fair value target of $18. That gives us plenty of good reason to snap up this morning just a little over $13. No doubt if this turnaround continues to unfold then $20+ not out of the question before the year ends.
