Every Saturday the StockTwits 50 report is released highlighting stocks with improving fundamentals and strong technical setups for the next trading week. Last week, Stone Fox Capital wrote an article on the underfollowed stocks in the StockTwits 50 report. The hope was to find stocks highlighted by the report that were cheap. The original conclusion was that the stocks didn't provide compelling valuations even though the sophisticated Seeking Alpha crowd doesn't follow them.
With this weeks report, the focus shifted to reviewing the bigger names on this list to see if maybe an advantage existed in companies where inclusion in such a publication would not move the price of the stocks.
The Big Dogs
Within the top 10 ranking this week were Hansen Natural (MNST), Under Armour (UA), Expedia (EXPE), 3D Systems (DDD), and Whole Foods Market (WFM). Other than 3D Systems, all of these stocks have market caps larger than $5B and definitely qualify as big dogs in the stock market.
Also, other than the surprisingly low 400 Seeking Alpha followers for Expedia, the stocks have roughly 1,000 or more followers. This far exceeds the less than 300 for the underfollowed list from last week.
Clearly these stocks are larger and more followed by investors, but does the size of these stocks and less influence from one report provide greater value?
On first note, all of these stocks have had at least 15% gains since joining the list. On top of that, only Whole Foods has been on the list less than 10 weeks. Maybe this is too small of a sample size, but it might indicate that the underfollowed stocks from the last report are more bargains than originally thought.
The Figure below highlights the growth rates and forward earnings multiples of the highly followed stocks. If you agreed with the last report on the valuation questions of the underfollowed stocks, than these numbers might provide sticker shock.
Figure - Valuation Metrics
|Stocks||Forward PE||5 Yr Growth Rate||PEG Ratio|
|Whole Foods Market||33.4||18.1%||2.1|
Note that three of the stocks have PEG ratios that exceed 2. Normally any stock trading above 2x the growth rate is considered extremely overvalued.
Combine the high PEG ratios with slower growth rates than the underfollowed group and it appears that the first group is much cheaper than originally thought.
A couple of noteworthy examples to prove the point.
First, 3D Systems is by far the smallest company on this list and it has the lowest PEG ratio by far and much more consistent with the previous list. Even though it has a rather large SA following of nearly 1,500, that hasn't greatly impacted valuation.
Second, though The Fresh Market (TFM) and Whole Foods generally compete in the same sector, the market appears to favor the much larger stock instead of the one with the faster growth. Remember Fresh Market is expected to grow at 23% compared to 18% for Whole Foods yet the PEG ratio is smaller at 1.7. While not much of a bargain itself, the stock is cheaper than the 2.1 ratio for Whole Foods.
The apparent conclusion is that the underfollowed stocks do have a cheaper valuation than the larger cap peers on the StockTwits 50 list. That valuation might not provide a compelling reason to dive into those stocks, but it does highlight the general markets these days where investors are less interested in owning the riskier, smaller stocks regardless of growth rates.
Investors should be warned that the data does back up the original thesis that the smaller, less known companies do provide the more compelling valuations. Too many investors appear enamored with the big dogs in the investing world regardless of valuation warnings.
Disclaimer: Please consult your financial advisor before making any investment decisions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.