Methodology

The hardest part may not be finding long-term winners, but finding winners that will perform well over the next three months, especially when you can't sell them along the way. The aim here is to build a high-performance, resilient selection. To achieve this, I rely on Evidence Based Investing, i.e. scientific research that has proven the relevance of certain investment strategies over time. This highly rational investment process has highlighted the relevance of certain investment factors.

The Momentum Picks selection is based primarily on two of these factors: Quality and Momentum.

  • Momentum: In the classic sense of the term, momentum is an investment approach that favors stocks that have been on an upward trend over the past six and twelve months. At MarketScreener, momentum includes not only data on the stock's positive trend over the short (3 months), medium (6 months) and longer term (12 months), a so-called "technical" momentum, but also analysts' revisions to net earnings per share and sales over the short and long term, weighted by the number of shares in issue. This is more "fundamental" momentum, based on the assumption that analysts are rather conservative in their revisions.
  • Quality: The quality factor favors companies with solid fundamentals, i.e. good profitability, strong balance sheets, low margin volatility, a good track record of earnings releases and good visibility on future results. 

Another advantage of the Momentum Picks selection is that every quarter, we reset our thinking. I start from scratch to create the best possible selection. This constant rethinking avoids clinging to old ideas that might not work as well. Having been a behavioral psychology enthusiast since my university days, I make a point of integrating mental models into my management process, so as to avoid being led astray by my cognitive biases as much as possible.

The selection is designed to generate the best possible risk/reward given its limited composition. However, a selection of just five stocks does not constitute a sufficiently diversified portfolio. Rather, Momentum Picks should be seen as a complement to an already diversified portfolio.

Analysis of past performance

In our previous selection, we chose Heico Corporation, AppLovin, Universal Health Services, Shockwave Medical and Brown & Brown. All these stocks were in the green at the end of the quarter. A portfolio weighted equally on these five positions would have generated a return of 8.72% versus 3.92% for our benchmark, the S&P 500 index, over the second quarter of 2024 (from 03/31/2024 to 06/30/2024), an outperformance of 4.8%. At individual level, AppLovin gained +20.23% over the quarter, Heico Corporation +17.07%, Universal Health Services +1.35%, Brown & Brown +2.14%, and Shockwave Medical gained +2.81%. Intravascular lithotripsy specialist Shockwave Medical was acquired by pharmaceutical giant Johnson & Johnson on its all-time high at a price of $335.

The Momentum Picks selection , which began on December 31, 2021, achieved a cumulative performance of 65.73%, compared with 14.57% for our benchmark, the broad US S&P 500 index, representing an outperformance of +51.16% in 2.5 years. To cite a few other indexes, the Nasdaq-100 posted a cumulative performance of 20.61% over the same period, the MSCI World 8.67% and the Stoxx Europe 600 4.84%. What's more, Momentum Picks' performance does not include the payment of dividends to shareholders over the period, so actual performance is even higher than these figures.

This extra performance is due to three main factors (two of which are controllable):

  • The use of a time-tested strategy based on scientific research;
  • A pragmatic, impartial and emotionally unbiased team management approach;
  • A little luck

Despite these very encouraging performances from our selection and management process, we must remain humble in the face of the market. I agree with François Rochon of Giverny Capital on the famous rule of three. One year out of three, the stock market will fall by at least 10%. One stock out of three will be a disappointment. One quarter out of three, the Momentum Picks selection will underperform the market. This is not a foregone conclusion, but rather an objective way of looking at stock market reality. There's always an element of chance. It's essential to be aware of this in order to prepare psychologically for the inevitable periods when the selection will underperform our benchmark.

Performance by quarter

The Momentum Picks selection has outperformed its benchmark (S&P500) in 8 of the last 10 quarters. We can therefore observe a certain recurrence of performance in phases of market contraction as well as expansion.

Cumulative performance

The new selection

Let's take a closer look at the five US stocks selected for the third quarter of 2024 (July to September).

Momentum Picks Q3 2024 Equal Weighted Selection

As you can see, we have retained three of the five previous positions: Heico, AppLovin and Universal Health Services. The two new positions are Freshpet and Nu Holdings.

Heico Corporation

The first stock featured in this quarterly selection, Heico Corporation rarely makes the headlines, unlike Nvidia or Novo Nordisk, but its track record is every bit as extraordinary as theirs. From a small supplier of spare parts for the aeronautics industry, Heico has become a major, well-established player in the aeronautics, aerospace and defense industries, and is also present in the medical, telecommunications and electronics sectors. Heico designs, produces and distributes niche products and services for airlines, overhaul shops and numerous small companies, as well as military defense and space agencies worldwide, in addition to manufacturers of medical, telecommunications and electronic equipment. In particular, it is the world's largest manufacturer of spare parts for FAA (Federal Aviation Administration) approved jet engines and aircraft components. The company was founded in 1957 as a holding company, bringing together a number of subsidiaries. Heico operates through two main segments: the Flight Support Group (FSG) and the Electronic Technologies Group (ETG). The FSG, which accounts for around 50% of sales and 35% of operating income, specializes in the design and manufacture of spare parts for jet engines and other aircraft components. ETG, on the other hand, generates 50% of sales and 65% of operating income, and focuses on the design and manufacture of critical subcomponents for military and space applications. Heico represents an exceptional investment case, with compound annual sales growth of 15% over the past 33 years. It has generated a total shareholder return of 21.2% per annum over the same period. It has leveraged its expertise in reverse engineering and its ability to rapidly obtain Federal Aviation Administration (FAA) approval for its spare parts, giving it an edge over its competitors. Heico has adopted an aggressive pricing strategy, offering spare parts at lower costs than original equipment manufacturers (OEMs), without the associated R&D costs, while maintaining a reasonable margin. As a result, it has become an indispensable supplier for most of its customers. The Mendelson family, which owns the company, holds around 19% of the shares and favors a long-term vision. Heico also encourages employee participation in the company's capital, thus aligning the interests of all stakeholders. The aviation aftermarket is estimated to be worth $14 billion by 2026, with a compound annual growth rate of 4.7%. Heico also has the potential to expand geographically through bilateral aviation safety agreements (BASAs). The pandemic has highlighted Heico's resilience and could offer growth opportunities as airlines seek to cut costs, potentially turning to alternative parts suppliers. The latest first-quarter release confirms ambitions and the positive earnings trend. Heico therefore deserves to remain in the next selection. It represents a strategic investment in the aerospace and military sector, thanks to its robust business model, distinct competitive advantage, long-term corporate culture and significant growth potential.

Universal Health Services

Universal Health Services is the most defensive of the five stocks presented today. The company, already present in the Q2 2024 selection, specializes in the ownership and management of healthcare centers. The group offers general and specialized surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, diagnostic care, coronary care, pediatrics, pharmacy and/or behavioral health services. The company is listed on the NYSE under the symbol UHS and is headquartered in King of Prussia, Pennsylvania. Acute hospital services account for 54.8% of its sales, while behavioral health services contribute 45.1%. The majority of its revenues come from the United States (94.67%), with a presence in the UK (5.33%). Universal Health Services is positioned in a competitive market, but its track record of success over the last three decades and its reputation help it to position itself well in this market. UHS has demonstrated steady sales growth, with an increase of 6.8% per year over the last 10 years. The company's profitability is underlined by a gross margin of 39%, an operating margin of 8% and a net margin of 5% by 2023. The financial situation is borderline acceptable, with leverage (debt/EBITDA) of 2.75x in 2023.  Management is experienced, with Marc Miller as CEO and founder Alan Miller playing an active role as a director. Good visibility on its activities and positive EPS revisions following good publications should continue to push the stock to new heights. The share price is trading on its all-time highs. What's more, the company has a good track record in terms of publications, often exceeding analysts' expectations. Universal Health Services presents an attractive investment opportunity for those looking to get involved in the healthcare sector. With stable growth, good visibility and experienced management, Universal Health Services could be a valuable addition to a diversified portfolio.

AppLovin Corporation

Palo Alto-based AppLovin Corporation is strategically positioned in the fast-growing mobile application ecosystem. The mobile applications market is in constant growth. According to market studies, the sector could reach a valuation of $674 billion by 2027. AppLovin, with its diversified portfolio of games and its AXON AI-based recommendation engine, is well placed to capitalize on this growth. Its AXON recommendation engine optimizes the match between ads and users. This machine learning technology increases ad click-through rates, generating more revenue for app developers and advertisers. The main source of revenue for mobile applications is advertising. AppLovin's technology plays a crucial role in optimizing these revenues. The company's portfolio includes over 350 free-to-play mobile games, covering a wide range of game genres. It has demonstrated its ability to maintain high margins, with a gross margin of around 67.7% and an operating margin of 19.7%. This testifies to the effectiveness of its business model and operational management. Although the market has already priced in some of AppLovin's growth potential, the company continues to offer attractive upside potential. AppLovin's management team, led by founder Andrew Karam and CEO Adam Foroughi, has significant experience in the technology sector. AppLovin has announced its intention to re-evaluate its application portfolio, which could lead to divestments and increased focus on its software business. This could also lead to improved margins and a higher valuation in the long term. AppLovin presents an attractive investment profile thanks to its attractive positioning in a growth sector, its advanced technology, and a resilient business model even in a cyclical sector like advertising. In my view, the digital advertising segment will be one of the first beneficiaries of advances in AI. The risks include Apple's ability to corner a share of the advertising pie via mobile applications. However, growth prospects, combined with effective management and a diversification strategy, make AppLovin an attractive investment for investors seeking exposure to mobile technologies and advertising.

Nu Holdings

Nu Holdings, listed on the NYSE in New York under the symbol NU, is a Brazilian company specializing in digital financial services. Founded in 2013, the company's mission is to revolutionize banking in Latin America by offering accessible, affordable and customer-centric financial solutions. Nubank offers a comprehensive range of financial products covering spending, saving, investing, borrowing and protection. The company operates mainly in Brazil, Mexico and Colombia, with a customer base of over 100 million people. Nubank operates as a neobank without physical branches, using a cloud-based, mobile-focused platform. Key services include credit and debit cards offering instant payment solutions and customized credit lines, interest-bearing savings accounts with complementary debit cards; investment products and services via the NuInvest platform; unsecured and secured loans, including personal loans and payday loans; and insurance, life insurance and funeral services via NuInsurance. Nubank is one of the world's largest digital banking platforms, serving over 100 million customers in Latin America. In Brazil, it covers 55% of the adult population. The company stands out for its customer-centric approach, advanced use of data science and fully digital model, enabling it to maintain low operating costs and high customer acquisition efficiency. Since its launch, Nubank has experienced exponential growth. In just four years, the company's sales have increased almost 12-fold, with a compound annual growth rate (CAGR) of 89%. In 2023, Nubank generated sales of USD 8.03 billion, up from USD 4.79 billion in 2022. Analysts forecast continued growth for Nubank, with estimated sales of USD 11.2 billion in 2024. The company aims to increase its average revenue per active customer (ARPAC) and broaden its customer base, particularly by targeting the 77.1 million unbanked adults in Brazil, Mexico and Colombia. For the first quarter of 2024, Nubank reported revenues of USD 2.7 billion, up 64% year-on-year. Net profit reached 379 million USD, an increase of 160% year-on-year. The company also announced the acquisition of Hyperplane, a data intelligence company, to strengthen its AI-focused strategy. Nubank plans to continue expanding in Mexico and Colombia, while increasing its market share in Brazil. The company also aims to launch new products and services based on technologies such as real-time payments, open banking and AI. The Brazilian company reported a gross margin of 43.2% for the first quarter of 2024, up 3 percentage points year-on-year. The operating margin reached 19.2% in 2023, and the net margin stood at 12.8%. The company also achieved a return on equity (ROE) of 18.2%. Although Nubank does not report free cash flow (FCF) due to the nature of its banking operations, it generates substantial interest income and maintains a strong cash position. A look at its balance sheet reveals $6 billion in cash and cash equivalents. The company has a loan-to-deposit ratio of 40%, well below that of its peers, and an asset-to-equity ratio of 6, favorable compared with the industry norm of 12 or more. Nu Holdings is therefore well positioned to repay its debts and finance future growth. David Vélez, co-founder and CEO, is a visionary leader with a solid background in finance and entrepreneurship. Cristina Junqueira, co-founder and Director of Growth, and Edward Wible, co-founder and former CTO, complete the management team. The continued involvement of the co-founders in the day-to-day running of the company is an extremely positive sign. David Vélez holds a 20% stake in Nubank, while Cristina Junqueira holds a 2.5% stake, ensuring a degree of alignment with the shareholders. The company has implemented a share-based compensation structure to align management interests with those of shareholders, with around 95% of employees owning Nubank shares. Nu Holdings trades at 33 times estimated earnings for 2024, which may seem high compared with its traditional peers. However, this premium is justified by rapid growth prospects, an innovative business model and rapid market share gains. The company has a vast untapped market in Latin America, with millions of unbanked adults and low credit card penetration rates. Nu Holdings thus presents an interesting opportunity for our selection of US-listed stocks.

Freshpet

Freshpet is a specialist in fresh food products for pets. Founded by Cathal Walsh and Scott Morris, the company stands out for its nutritional philosophy based on fresh, meat-based food with minimal processing. Products include dog and cat food, all made without preservatives or additives. The company offers its products under the eponymous brand name and sells them via a network of branded refrigerators, the "Freshpet Fridges", installed in various points of sale. These fridges can be found in grocery stores, mass merchandisers, clubs, pet specialty stores, natural health stores and digital platforms. The company sells mainly in the USA and Canada, with a marginal presence in Europe, although this is a future growth lever to be exploited. Freshpet is a leader in the fresh pet food segment, with a 96% market share in the new fresh and frozen cat and dog food segment. Freshpet has enjoyed resounding success in recent years. Sales have risen from $87 million in 2014 to $767 million in 2023, representing almost 30% CAGR over the past decade. This growth has been underpinned by a steady increase in demand for fresh, natural pet food, with owners increasingly concerned about animal welfare. Analysts on the case anticipate strong business volume growth in the years ahead. For 2024, the company is forecasting sales of 960 million, an increase of 25% on 2023. Profits should also grow significantly, with EBITDA expected to reach $124.5 million in 2024, compared with $66.6 million in 2023. In fact, the company achieved its first positive earnings quarter at the end of 2023 (net income of $15 million in Q4 2023). For the first quarter of 2024, Freshpet reported impressive results: Sales of 223.8 million (+33.6% year-on-year) with a gross margin of 39.4% (versus 30.3% the previous year). Net income was $18.6 million (versus a net loss of $24.8 million the previous year). For the full year 2024, Freshpet forecasts adjusted EBITDA of at least 120 million. Freshpet has shown a significant improvement in profitability in recent quarters. This improvement is due to better management of production costs and a reduction in quality costs. Freshpet generated operating cash flow of USD 5.4 million in the first quarter of 2024, compared with cash utilization of USD 13.7 million in the first quarter of 2023. The company expects to be free cash flow (FCF) positive by 2026. At March 31, 2024, Freshpet had USD 257.9 million in cash and USD 393.6 million in net debt. The company has shown a significant improvement in its cash position, enabling it to support its long-term capital requirements. With net cash of USD 257.9 million and positive operating cash flow generation, Freshpet is well positioned to repay its debts. With nearly 8 years at Freshpet, William Cyr (CEO) has extensive experience in the consumer goods industry. Freshpet's Board of Directors is made up of experienced members, including David West, Daryl Brewster and Joseph Scalzo, who bring valuable expertise in strategy and governance. At its current price of 129.25 USD, Freshpet is trading at a very high earnings multiple ( 193 times its anticipated earnings per share for the current financial year). However, profitability is very recent, and margins will surely continue to improve, not necessarily in the short term (by 2024) but most certainly over the next three years. Although this multiple may seem high, it also reflects the company's high growth expectations, which could double sales and triple net income in the next two years. The company pays 6.5 on sales, a more reasonable follow-up ratio. Freshpet is a high-growth company with recurring revenues has shown impressive revenue and earnings growth, with prospects for continued growth. With a market share of just 3% in the overall dog/cat food market (not just fresh), Freshpet has significant growth potential. At the current share price, the stock offers attractive upside potential, despite its high initial price.

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Disclaimer: The information, analyses, charts, figures, opinions and comments provided in this article are intended for investors with the knowledge and experience required to understand and appreciate the information developed. This information is provided for information purposes only, and does not represent an investment obligation or an offer or solicitation to buy or sell financial products or services. It does not constitute investment advice. The investor is solely responsible for the use of the information provided, without recourse against MarketScreener or the author of this article, who are not liable in the event of error, omission, inappropriate investment or unfavorable market trends. Performance figures do not include brokerage fees. Investing in the stock market is risky. You may incur losses. Past performance is not a guide to future performance, is not constant over time and is not a guarantee of future performance or capital.