January 21, 2024 – It turns out it indeed was a suckers’ rally.
The junk stock surge that accompanied 2023’s year-end stock market bull run, in which the most shorted securities jumped more than 20% in a matter of weeks, has completely reversed itself over the first few weeks of January.
During the challenging environments in which one questions the logic of including hedging and short selling within a well-diversified portfolio, it is important to heed the lesson we relearn every time a short squeeze reverses (as it always does).
Fundamentals are robust and dependable. Short squeezes are ephemeral and fragile.
As such, the data reminds us that equity returns can be generated both long and short. For example, over the past 5 years, the Alpharank top-decile Canadian stock portfolio gained nearly 150% while the bottom-ranked portfolio returned just below zero. Over the same period, a stock portfolio consisting of Alpharank’s top-decile U.S. stocks gained approximately 130%, while the bottom-ranked decile of U.S. equities lost more than -20%.
While there were plenty of fits and starts, including the painful junk rally of 2020, fundamentals always win over the long term. If systematic long-short equity investing based on proven drivers of return (such as value, quality, and operating momentum) worked every month, then everyone would do it and the market inefficiencies enabling its alpha generation would cease to exist.
For January, we highlight one top-decile stock expected to outperform and one bottom-decile stock expected to underperform in this month’s AlphaRank Top Stocks.
OUTPERFORM: Constellation Software’s (CSU) business model focuses on acquiring and managing a diverse portfolio of vertical market software companies. These are businesses that provide specialized software solutions catering to specific industries or niches, such as healthcare, the public sector, or logistics. This model allows for diversification across various sectors, reducing risk. The company has a strong track record of growth through strategic acquisitions. Historically, Constellation Software has demonstrated robust financial performance, with a consistent track record of revenue growth and profitability. With Constellation’s value-creating business model and exceptional historical returns for investors, some view it as a “Berkshire Hathaway 2.0”. CSU has an Alpharank score of 98/100 and is the sixth top-ranked Canadian equity, expected to outperform. (Disclosure: Long CSU in the Accelerate Absolute Return Hedge Fund (TSX: HDGE) and the Accelerate Enhanced Canadian Benchmark Alternative Fund (ATSX)).
UNDERPERFORM: Luminar Technologies (LAZR) is a company specializing in the development of sensor technologies for autonomous vehicles, particularly focusing on LiDAR (Light Detection and Ranging) technology. The market for autonomous vehicle technology, including LiDAR, is highly competitive. The success of Luminar heavily depends on the broader adoption of autonomous driving technology and the integration of its LiDAR systems into production vehicles. Delays in technology adoption or integration setbacks could negatively affect the company’s growth and revenue prospects. The company’s negative free cash flow, dilutive equity issuance, and poor share price performance give the stock a challenging outlook. LAZR’s 27.6% short interest, one of the highest in the market, indicates that short sellers have honed in on these challenges. Notably, empirical data show that high short interest predicts future share price underperformance.
AlphaRank Top Stocks represents Accelerate’s predictive equity ranking powered by proven drivers of return. Stocks with the highest AlphaRank are expected to outperform, while stocks with the lowest AlphaRank are anticipated to underperform. AlphaRank assigns a numeric value to each security from zero (bottom-ranked) to 100 (top-ranked) based on selected predictive factors. All Canadian and U.S. stocks priced above $1.50 per share and $100 million in market capitalization are evaluated. In both the Accelerate Absolute Return Hedge Fund (TSX: HDGE) and the Accelerate Enhanced Canadian Benchmark Alternative Fund (TSX: ATSX), Accelerate funds may be long many top-ranked stocks and short many bottom-ranked stocks. See AccelerateShares.com for more information.
