In this piece, we will take a look at Piper Sandler’s top technical stock picks and the top 20 stocks.
The start of October has seen another wild swing for markets. September’s second half saw Wall Street rejoice as the Federal Reserve delivered its highly anticipated interest rate cut. After an initial muted response from markets predicated on worries that the jumbo 50 basis point rate cut might have been due to economic worries, markets soared. Between the day the rate cut was announced and at the September end, the flagship S&P index and the broader NASDAQ index gained 2.6% and 3.5%, respectively.
However, trading during the first four days of October paints a different picture. From October 1st to the 4th, the flagship S&P shed 0.20% and the broader NASDAQ ended up losing 0.28%. This bearishness was fueled by the Labor Department’s JOLTS data which showed that job openings in America grew in September. For markets, this meant that the Fed now had more room to keep rates higher for longer, and investors started to price out a 50 basis point cut in November. Additionally, job openings grew by 8.040 million and beat economist estimates by nearly half a million openings. Investors also dealt with a tough global geopolitical environment after tensions continued to escalate in the Middle East following Iran’s attacks on Israel.
After the JOLTS data, October 4th came with more good news for investors who were worried about the economy. JOLTS was followed by the highly anticipated nonfarm payrolls data, which further dented hopes for interest rate cuts. This data showed that unemployment in America had fallen to 4.1% and the nonfarm payrolls had jumped by 254,000 which was the highest figure for the preceding six months. Economists had predicted the payrolls to grow by 140,000, so safe to say, the latest data blew these out of the park.
On the surface, the immediate implications of this would seem to imply that as rates can now stay higher for longer than investors had expected, stocks should fall. However, on the day of the nonfarm payroll data release, the flagship S&P and the broader NASDAQ gained 0.90% and 1.22% higher, respectively. Sounds strange, right? Well, some fresh commentary from Baird Wealth Management’s investment strategy analyst Ross Mayfield can provide some insights. He believes that the latest data set was “not the perfect report, but that’s kind of what you need for a soft landing anyways. Some broad based jobs added, but nothing too concerning for the Fed, right, in the form of reaccelerating wage inflation. So kind of a perfect Goldilocks soft landing report.” However, Mayfield adds that the nonfarm jobs report gives the Fed “reason to only go 25 basis points in November, probably 25 in December as well.” Yet, the somewhat ‘still warm’ labor market doesn’t take rate cuts completely off the table. According to the Baird analyst, “the Fed is trying to get back to neutral policy” and subsequently 25 basis points should be the way to go for the rest of the year.
Brad Bernstein, managing director at UBS Private Wealth Management, believes that some stock categories are better suited for the rapidly evolving environment that we’re facing right now. In an interview a day before the nonfarm data release, the Bernstein executive shared that financials, technology, and utility stocks have seen strong performance this year. Starting from financials, the analyst outlined that due to the low interest rates, “the improving yield curve for their balance sheet and what that means for their ability to lend at higher rates and pay cheaper rates on cash savings.”
As for utility stocks, Bernstein outlined that these have benefited from the Fed’s rate cut cycle, adding that small cap stocks have started to shine in the third quarter. According to him, “small cap has worked well in the last few months as well. So one interesting take away from the third quarter is for the first time the equal weight S&P outperformed the S&P. And small cap outperformed the S&P. So we’re seeing a real broadening out of markets and diversified portfolios, balanced portfolios look fantastic for the next 12 to 24 months in our opinion.” For more details on what investment bank Goldman Sachs believes about this bifurcation in the stock market, be sure to check out Goldman Sachs’ Best Hedge Fund Stock Picks: Top 20 Stocks.
The Baird analyst shared his take on the stock market after the nonfarm payroll data release. As per Mayfield, the optimistic economic outlook stemming from the labor market means that cyclical stocks might be worth their while (we covered some cyclical stocks as part of our coverage of 10 Best Consumer Cyclical Stocks To Buy Now). When building a portfolio, the analyst believes that “on the equity side, I really want to do anything but get too defensive here, you know, we have soft landing as our base case we think economic growth is strong, earnings are on the rise.”
These shifts in the stock market, which appear to be in their early stages, have also impacted analyst earnings estimates. According to FactSet, between June 30th to September 30th, the bottom up EPS estimate for Q3 has been revised downwards by 3.9%. This is a striking figure since FactSet adds that average downward revisions for the previous 20, 40, 60, and 80 quarters were 3.3%, 3.3%, 3.2%, and 4.1%, respectively. Consequently, except for the 80 quarter revisions, the current revisions have surpassed all estimates. Sector wise, only information technology Q3 EPS estimates have been revised upwards (by 0.3%) while all others have seen downward revisions. Within these, energy, materials, and industrials lead the pack with their EPS revised downwards by 19.2%, 9.4%, and 8.5%, respectively.
One way to see how investor sentiment is matching these shifts is by analyzing technical patterns. Therefore, let’s take a look at Piper Sandler’s bottom up stocks that are seeing improved technical ratings.
A close-up of a laptop monitor with stock market prices scrolling up and down.
Our Methodology
To make our list of Piper Sandler’s top technical stock picks, we relied on the firm’s list of stocks with improving technical grade ratings lower than or at 19 as of the third week of August. These stocks had ratings higher than or at 20 in the preceding five weeks. The stocks were ranked by the number of hedge fund investors that had bought the shares during Q2 2024.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
20. SkyWater Technology, Inc. (NASDAQ:SKYT)
Number of Hedge Fund Holders In Q2 2024: 8
SkyWater Technology, Inc. (NASDAQ:SKYT) is a small backend semiconductor company. The firm offers chip production development services to manufacture signal processors, integrated circuits, and other items. SkyWater Technology, Inc. (NASDAQ:SKYT)’s presence in the radiation hardened integrated circuits market makes it a key partner of the Pentagon. This is important for the firm since national security concerns resulting from a global chip supply chain have forced the US government to earmark billions of dollars in spending through the CHIPS and Science Act. SkyWater Technology, Inc. (NASDAQ:SKYT) could benefit from the ripples of this spending as the firm canceled a $1.8 billion plan to build a manufacturing facility in Indiana. Being a defense contractor also means stable revenue that is insulated from the semiconductor industry’s cyclical downturns. As an illustration, SkyWater Technology, Inc. (NASDAQ:SKYT)’s shares soared by a whopping 48% in August after second quarter revenue jumped by 33% on the back of strong performance by its tooling business. The quarter saw SkyWater Technology, Inc. (NASDAQ:SKYT) post a positive non GAAP EPS for the first time in its history, and the tooling business primarily serves the needs of the aerospace and defense industry.
SkyWater Technology, Inc. (NASDAQ:SKYT)’s management commented on the tooling business, called ATS, during the Q2 2024 earnings call:
“First, our strong results for second quarter and continued confidence in the growth expected in our ATS business for fiscal 2024 underscore the strategic importance of multiple aerospace and defense programs underway at SkyWater. Altogether, our expectation is that, the majority of our growth this year will be driven by several strategic A&D programs, witnessing consistently strong demand coupled with steady improvements in our capabilities and operational execution.
For Q2 specifically, we witnessed some pull-ins of demand from the second half, which we expect will result in a slightly front-half loaded year for our ATS business in 2024. Overall, we believe these programs are secure and well-funded. The added revenue tailwind of record level tool sales is yet another proof point of our customers’ confidence in SkyWater as a trusted domestic source of critical semiconductor technology.”
19. Omnicell, Inc. (NASDAQ:OMCL)
Number of Hedge Fund Holders In Q2 2024: 18
Omnicell, Inc. (NASDAQ:OMCL) is a healthcare services provider. The firm caters to the needs of healthcare providers and pharmacies by allowing them to manage inventory, automate drug dispensing systems, and package medications. As of H1 2024, 47% of the firm’s $523 million in revenue came via its connected devices and associated items. As a result, this segment is key to Omnicell, Inc. (NASDAQ:OMCL)’s hypothesis and it requires the firm to regularly roll out product updates to grow revenue. On this front, Omnicell, Inc. (NASDAQ:OMCL) is currently upgrading its XT dispensing systems, which could create tailwinds for the company moving forward. Additionally, with the Fed having started its rate cut cycle, businesses should find more resources to spend on product upgrades. The company also benefits from a diversified business model through which it also generates high margin revenue via services. The services business offers support for Omnicell, Inc. (NASDAQ:OMCL)’s hardware products and additional services such as inventory management and IV compounding.
Brown Capital was full of praise for Omnicell, Inc. (NASDAQ:OMCL) in its Q4 2023 investor letter. Here is what the firm said:
“Omnicell is one of the leading manufacturers of medication-adherence solutions for healthcare-delivery systems. Studies have shown that wasted medications alone cost hospitals nearly $800 million annually. Omnicell aims to solve this problem. Its products, which consist of automated dispensing systems, medication cabinets and pharmacy robotics, ensure the right medication gets to the right person in the right quantity, saving lives, money and headaches. This is the second consecutive quarter Omnicell has been among our top detractors as macroeconomic factors plaguing the company persist. Hospital budgets remain tight, leading to delays in purchases and slower upgrade cycles, causing Omnicell management to reduce guidance once again. Given ongoing uncertainty around demand, management announced a restructuring plan that will generate $45 million to $55 million in annual cost savings.”
