StockTwits publishes a weekly list called the StockTwits 50 that encompasses a list of stocks with strong fundamentals and technical characteristics. Read more about it here.
For anybody not familiar with it, the list provides a selection of 50 stocks with the highest scores based on their algorithm. Some well known names such as Under Armour (UA) appear on the list and others not known like Cyberonics (CYBX) made it. Even the largest market cap stock, Apple (AAPL), ranks in the middle of the list.
The key to such lists is that it isn't biased by personal emotions. It favors the companies with the best fundamentals such as improving earnings combined with strong technical setups. Though one needs to understand that such data is only as good as the available sources or even the programming.
While reviewing the current list here, Stone Fox Capital came across several stocks that are relatively unknown and several ones that appear just off the charts expensive. The main issue with most of these types of reports is that it tends to list stocks that have already had major runs.
For example, the top stock, Liquidity Services (LQDT), has had a 200% gain since last August and a 59% gain since being first included on the list 17 weeks ago.
Any investor running into this stock now needs to understand the purpose of the report. Attempting buy and hold could be dangerous.
In order to see which of the 50 stocks were underfollowed, the tickers were run through the number of alert followers on Seeking Alpha (SA). Is it possible to find a high quality stock that the market hasn't found yet?
The following stocks were chosen for further research as the companies are underfollowed by the SA community with less than 300 followers each. As an example, highly followed companies such as Under Armour has nearly 1,000 followers while market behemoth Apple has over 50,000 followers.
Align Technology (ALGN) has a $2.4B market cap, but the stock only has 128 followers on SA. The company is a medical device designer, manufacturer, and marketer of clear aligner systems or Invisalign systems, intra-oral scanners, and computer-aided design (CAD) and computer-aided manufacturing (CAM) restorative models used in dentistry, orthodontics, and dental records storage.
Analysts forecast a 19% growth rate while the stock trades at 22x next years earnings of $1.35. Considering the current weak market, any stock trading at more than 1x the expected growth rate can be considered expensive.
The stock has been on the StockTwits 50 list for 6 weeks now, but so far the performance has been a disappointing 3.4% loss.
Allot Communications (ALLT) has a $822M market cap and has 290 followers. The company engages in developing, selling, and marketing internet protocol optimization and revenue generation solutions around the world.
Analysts forecast a 25% growth rate with the stock trading at 34x forward earnings. Though the report shows 99% revenue growth for Q112 Allot, analysts only expect 35% growth for Q212.
The stock ranks tied for first place with a ST score of 9.5. Even though this is only the second week on the list, Allot has already gained 10.2%.
CoreSite Realty (COR) has a $505M market cap and 91 followers. The company engages in the ownership, acquisition, construction, and management of data centers as a real estate investment trust (REIT). The data centers are located in Los Angeles, San Francisco, Northern Virginia, Chicago, Boston, New York City, and Miami.
Analysts forecast 9% growth and the stock trades at 14x forward earnings. In the Q112 report, CoreSite reported 44% earnings growth while StockTwits lists 100%. For Q312, analysts only forecast a meager revenue growth of 10% showing the potential for a substantial slowdown in the growth rate used to justify the inclusion of the stock.
SXC Health Solutions (SXCI) has a $6.5B market cap and only 260 followers. The company provides pharmacy benefit management services and healthcare information technology solutions to the healthcare benefits management industry in North America.
Analysts expect a 28.5% growth rate and the stock trades at 32x forward earnings. The report shows over 50% growth used for Q112 calculations making this stock one of the few researched where the forward growth is expected to keep on track with over 40% revenue growth forecast for Q212.
The stock ranks near the top of the StockTwits list with a 9.3 score. The stock price hasn't moved much after being on the list for the last six weeks at least providing new investors an attractive entry point.
The Fresh Market (TFM) has a market cap of $2.65B and a surprisingly low 115 followers. The company operates as a specialty grocery retailer with 116 stores in 21 states mostly in the eastern part of the US.
Analysts forecast a 23% growth rate and the stock trades for 33x forward earnings. In the Q113 report, Fresh Market reported a 32% increase in adjusted earnings compared to the 200% listed by StockTwits. For Q2, analysts are only forecasting 20% earnings growth so that appears more relevant than whichever number is used in Q1.
The stock ranks in the middle of the report with a ST score of 8.9. With only one week on the list and a small loss, this stock provides the opportunity to buy at the price of entry onto the report.
Tangoe (TNGO) has a market cap of $754M and only 113 followers. The company provides communications lifecycle management software and services primarily to large and medium-sized businesses and other organizations worldwide.
Analysts expect 37.5% growth and the stock trades at 36x forward earnings. Again the reported earnings numbers while impressive at 50% don't appear to match the 278% listed by StockTwits.
The stock ranks in the middle of list with a score of 8.9. Tangoe has been on the list for four weeks with the largest loss on the list of nearly 11%.
Web.com Group (WWWW) has a market cap of $788M and only 116 followers. The company is a leading provider of online marketing for small- and medium-sized businesses (SMBs) including domain name registration services, website design, logo design, search engine optimization, and search engine marketing.
Analysts expect 15% earnings growth while the stock only trades for 9x forward earnings. Though StockTwits lists 202% revenue growth, investors need to be aware that a large part of that growth was due to the Network Solutions acquisition. Analysts only forecast 8% revenue growth for 2013.
Web.com ranks at the top of list with a ST score of 9.5. The stock has been on the list for five weeks with a minimal gain of only 5%. Considering most of the top ten stocks have already had 10-20% gains if not more, this stock provides a good entry point for those using the report.
The StockTwits 50 list provides a interesting starting point for any investor. The stocks on the list are a mixture of well known companies and under the radar ones.
Unfortunately from the research, even the companies not well followed on SA have rich valuations. Possibly the inclusion on the StockTwits 50 list has lifted values without greatly lifting followers. Or maybe the algorithm used is captured by other such reports or even hedge funds that has led to higher investments already.
The biggest concern remains whether the fundamentals of the included stocks accurately reflects the potential of the company. A stock posting a one time 200% increase in earnings won't perform that well if earnings drop to a more reasonable 20% gain going forward. Not to mention the doubts over the accuracy of some numbers used in the report
Investors clearly need to beware of the potential downside risk as bargains don't exist in the underfollowed stocks as expected. While the report clearly highlights some big winners, it doesn't provide that many compelling investment ideas. Not to mention it is very unclear how the report performs with stocks falling off every week not included. At most, investors should only use it as a starting point to further research. The compelling valuations just don't exist.
Disclosure: I am long AAPL.
Additional disclosure: Please consult your financial advisor before making any investment decisions.