6 Stocks for Mid-Terms and Market Uncertainty

Key Concepts

• Barbell Investment Strategy: A portfolio management approach that balances high-growth, aggressive stocks with stable, dividend-paying stocks to mitigate volatility.
• Quantitative Analysis (Quant): A data-driven investment methodology that uses computer processing to evaluate stocks based on fundamental metrics (Value, Growth, Profitability, Momentum, and EPS Revisions) relative to their sector.
• Midterm Election Seasonality: A historical market pattern where equities tend to experience weakness or flat performance leading up to midterm elections, followed by a recovery period.
• Factor Grades: A proprietary Seeking Alpha grading system (A+ to F) that compares a company’s metrics against its sector peers.
• PEG Ratio: Price/Earnings-to-Growth ratio, used to determine a stock's value while accounting for its growth rate.
• Alpha Picks & ProQu (PQP): Seeking Alpha’s quantitative subscription portfolios that provide systematic, data-backed stock recommendations.

1. Market Overview and Macro Context

Steven Crest emphasizes that in the current volatile environment—marked by geopolitical tensions and the approach of midterm elections—investors should avoid emotional decision-making.

• Sector Rotation: Recent data shows a shift where technology and consumer discretionary stocks have rallied, while healthcare, utilities, and energy have underperformed.
• Midterm Volatility: Historical data from 1950 indicates that the 12 months preceding midterm elections often see an average drawdown of 18.2%. However, the 3, 6, and 12-month periods following elections historically show positive returns (averaging 14.8% over 12 months).
• The "Broken" Hedge: Traditional safe havens like gold and utilities have not behaved as expected recently, showing higher correlations with the U.S. dollar rather than acting as pure defensive hedges.

2. The Barbell Approach: Recommended Stocks

Crest suggests a balanced portfolio of three growth-oriented stocks and three income-oriented stocks to navigate potential market turbulence.

Growth Picks:

1. Credo Technology (CRDO): AI infrastructure supplier. Quant Strong Buy. Valuation is attractive (B- grade) despite a 287% 52-week gain. PEG ratio of 0.52 indicates a 65% discount to the sector.
2. Ichor Holdings (ICHR): Semiconductor materials/equipment. Quant Strong Buy. Strong momentum (A+) and positive analyst revisions (A-).
3. Constellium SE (CSTM): Aluminum producer. Quant Strong Buy. Forward PE of 9.58 (43% discount to sector). Strong momentum (A+).

Income/Defensive Picks:

1. Newmont Corporation (NEM): World’s largest gold producer. Quant Strong Buy. High profitability (A+). Note: Corrected 52-week return is ~110%.
2. Postal Realty Trust (PSTL): Niche REIT with 100% rent collection from the U.S. Postal Service. Yield: 4.22%. Forward AFO growth rate is 250% above sector median.
3. The Hanover Insurance Group (THG): Property and casualty insurance. Quant Strong Buy. Attractive valuation (A- grade) and high growth (A+).

3. Quantitative Methodology

The Seeking Alpha quant system removes human bias by:

• Normalization: Processing SEC data through S&P Global for ~5,000 stocks daily.
• Sector Relativity: Comparing companies against their specific industry peers rather than the broad market.
• Disciplined Rebalancing: Using systematic triggers (e.g., holding for 180 days or until a rating drops to "Sell") to manage portfolio turnover.

4. Key Arguments and Perspectives

• Consistency Over Timing: Crest argues that "cherry-picking" market bottoms is ineffective. He advocates for consistent, disciplined investment regardless of whether the market is at a 52-week high.
• The "52-Week High" Myth: Crest asserts that stocks near 52-week highs often outperform those near 52-week lows, provided the fundamental metrics (Value, Growth, Profitability) remain strong relative to the sector.
• The Role of Dividends: Dividend-paying stocks are essential for reducing portfolio volatility, especially in taxable accounts where they provide both income and potential capital appreciation.

5. Synthesis and Conclusion

The webinar highlights that while geopolitical and political events (midterms) create short-term nervousness, investors should maintain a barbell strategy. By combining high-growth AI-exposed stocks with dividend-paying defensive assets, investors can capture upside while cushioning against potential drawdowns. The core takeaway is to rely on quantitative data—specifically sector-relative factor grades—to identify companies with strong fundamentals, rather than reacting to market noise or "talking heads."

Note: Seeking Alpha is launching a new "Quant Growth and Income" portfolio in June, focusing on 30 dividend-paying stocks that maintain "Strong Buy" or "Buy" quant ratings.