July 2022 Perfect Stocks

July 2022 Perfect Stocks

Market momentum is red. With the end of the first half of 2022 and the end of the second quarter, institutions continued to sell off stocks into the close. Far more stocks hit new annual lows than annual highs, and investors are dissecting the report showing that Quantitative Tightening has finally begun.

This month, the Federal Reserve delayed its efforts to start tightening its massive balance sheet. Well, drop the confetti. Quantitative Tightening has begun. Yesterday, the Fed sold roughly $19.5 billion in assets back into the market. Here’s the breakdown of the Central Bank’s balance sheet after Wednesday. 

The decision by the Fed to remove an amount of capital that rivals Afghanistan’s annual GDP is the latest wrinkle in this market. And it’s a reason that you need to focus again on fundamentals, and trade around them properly. 

Now that it’s about to be July, it’s time to turn our attention to the second half of 2022. The S&P 500 just finished its worst first half since Richard Nixon was President in 1970. In a negative momentum environment, I prefer to sit in cash. 

But I recognize that you need a strong watch list for when things turn green again. And there’s no better list than the one that I offer you each month. That’s right… It’s time for the top F&Z Score stocks for July. 

The Month’s “Best” Stocks

How do we trade the best stocks? Cash secured puts and credit spreads offer you  great potential as you’re dipping a toe back into the market. If you’ve followed me over the last few weeks, I’ve written extensively about these trades and told you the momentum indicator after every single trading session.

The stocks that I am discussing are ones built for long-term rebounds and breakouts. These are stocks that you can also position size into over the months ahead…

I look at three different metrics to help build a list of winning stocks that are low-risk, high-upside stocks given their rock-solid balance sheets. This is the ultimate Do-It-Yourself lesson. Start right here to find perfect stocks: 

  • The Piotroski F-score 
  • The Altman Z-score
  • A valuation rank

Here’s How It Works

Let’s start by finding positive financial growth and low debt exposure. That’s where the Piotroski F-score succeeds. The F-score is a NINE-POINT system that rewards each company for meeting a certain criterion on its balance sheet. If the company meets all nine criteria, it has an F-score of 9. That means it’s perfect.

The Altman Z-score is a weighted average of five metrics to determine whether a company might go out of business. If a company falls below 2.6, it has a risky balance sheet. That risk is tied to a balance sheet that likely has lots of debt or weak cash flow. We are looking for stocks with a Z-score of 3 or higher. 

This is pure forensic analysis. But let’s add one last element to this. We want our stocks to have attractive valuations. We don’t want to trade at 15 times sales or 30 times revenue. And we don’t want to have negative book value or negative EBIT. 

So, we aim for stocks with attractive buyout values. I use EV/EBIT to allow us to have a proper “apples to oranges” comparison today. I’ll keep the number at roughly 7 or less.

The List of July 2022 Perfect Stocks

Okay… Here are your top F and Z score stocks that make up July 2022 perfect stocks: 

StockF-ScoreZ-Score
LyondellBasell Industries (LYB)93.23
CF Industries (CF)93.36
Photronics Inc. (PLAB)94.31
Donnelley Financial Solutions (DFIN)93.47
P.A.M. Transportations Services (PTSI)93.35
Covenant Logistics Group (CVLG)93.55

There are some beaten-up stocks on this list following the negative momentum environment we’ve seen since June 8. But with the quarter starting on Friday, look to see if any of them catch a bid. And use deep out-of-the-money puts as a potential entry point for these stocks.

Why deep out of the money? If the stocks go higher, you’ll make money. If the stocks don’t reach the strike price, you’ll make money. And if the stock falls to the strike price, you’ll get a great stock at a much cheaper valuation than today. It’s a “win, win, win.”

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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