Quant Q&A with Steven Cress

0:10Steven Cress:Steve Cress, our head of quant, our quant aficionado, fresh off his top stocks for the new year for 2026. Steve, welcome back to Investing Experts. Thank you so much for having me today. I really appreciate it. Well, thanks for making the time in such a busy day. I know people are absolutely beside themselves with excitement that they now know your top 10 stocks for the year. And we're going to have that excerpted from the webinar up on investing experts this week. So look for that. But as promised for those paying attention a couple of episodes ago, we promised that we would have a Q &A episode with you.

0:50Steven Cress:So that's what we are going to do today. So I'm just going to fire off some questions. We have not shared these with Steve before, so the answers are fresh and top of mind. So the first question is about Credo Technology, one of your picks in the past. And they are wondering why they say Credo has been stagnant a while. So why the high momentum rating is still in Quant? Okay, so taking a look at the momentum rating, it has a drop compared to where it was six months ago. It's currently a B, and six months ago, I'm sorry, it's an A+. So I was looking at the revisions rate. Revisions has dropped a B from an A-, so a slight drop there.

1:32But momentum for it is still an A+. And if we look at it, there's four different price points or periods that we assess for momentum. It's three months, six months, nine months, and 12 months. So the 12-month performance shows that the stock is up 101 % versus the sector at 0.36. So the sector is virtually unchanged over a 52-week period. Over the last nine months, momentum for credo is up 232 % versus the sector at 15%. For a six-month period, credo is up 60 % versus the sector negative 0.33. And for the three-month period, credo is down 4.28 % compared to the sector down 6.39%. So in terms of momentum on all four periods, it's actually outperformed the sector.

2:31Steven Cress:Very good. Appreciate that. The next question is, can you please explain the Z score? Sure. So we use a Z score for all the financial metrics. whether it's PE or review growth or EPS growth or EBITDA growth. And what goes into Z-score is you're taking the absolute data point for that metric versus the average or a median data point for the sector. And you create a ratio out of it, and that becomes the Z-score. Typically, Z-scores in our world range between positive three and negative three. and we then take that z score and basically create a grade out of it so we have a grading system it's an academic grading system that runs a plus through f and we're basically turning that z score into a grade so when you look at that grade it shows you it gives you an instant characterization of how that metric compares to the rest of the sector so it could be an a plus it could be a b it could be a C, or it could be an F.

3:38And that tells you if that particular metric is strong or weak. The reason why I use the academic letter grades is I feel like if you just keep looking at Z scores, you want to put a bullet in your head. So an academic letter grade is just much easier to look at in terms of giving that instant characterization.

3:55Steven Cress:Okay, we've had a couple of questions about Merck as a pick last time. So the first question is why Merck and not Pfizer? They're saying that there were better metrics all around in Pfizer. And there was an answer to that question saying that there's a terrible record of the management team at Pfizer. They were wondering if that's one of the reasons. So we'll start there for 1A of our Merck question. Okay, so what I would typically do in a case like this is I go to the platform and I'll pull up one of the stocks. In this case, I'll pull up Merck. I'm going to go to the peers tab and Pfizer and Merck are on the peers tab.

4:37and there are a number of other stocks but i'm actually going to just delete the other stocks that are in the peers tab so i could simply look at the two and i'm going to compare those and i could see that both have a strong buy merc currently ranks number five out of 179 stocks in the sector and pfizer ranks seven out of 179 stocks in the sector so it beats it slightly it's you know ranked two above pfizer in terms of the quant factor grades valuation on merck is a b minus compared to pfizer which is an a so that means actually pfizer is more attractive out of valuation standpoint the growth for merck is a minus versus pfizer at a plus both have profitability of an A+.

5:24The difference we see, though, is momentum for Merck is a B-, where Pfizer is a C, and the EPS revisions are both B. So it's basically, you know, winning by a nose. They're very close, but Merck just beats it slightly on the momentum basis. When I am looking at the total returns, I could see over the last one month, Merck is up 10.4%, and Pfizer is down 2%. Over the last three months, Merck is up 23.5%. Pfizer is down 5.5%. And over the last six months, Merck is up 37%. And Pfizer is up 4%. So I'm glad we recommend the Merck over Pfizer.

6:09Steven Cress:Another chance for a victory lap. Okay, here's the next question. I look for stocks that have great fundamentals, but sometimes they suffer an adverse effect, which has resulted in the quant valuation going down. Energy transfer is an example that I loaded up on after the pandemic. What do you suggest I do with stocks that go up in price and dividends, but are now low hold ratings? The first part of the question is on energy transfer, I believe. Well, yeah, they're saying that that was an example of a stock that had good fundamentals. It hit a challenging period and then its quant valuation went down.

6:44That will happen to stocks. Particularly in the energy world, it's very sensitive to the price of oil, any particular energy stock. Oil obviously has gone down quite a bit. There's been more supply of the market, less demand, a lot of pumping. The administration in the U.S. is pump, pump, pump. So it has not helped the price of oil go up. And that has a negative impact on many energy stocks. So the fundamentals change. As the fundamentals change, the ratings can change as well. That is what has happened with energy transfer, going from a strong buy to a hold.

7:21Steven Cress:Anything to keep in mind when it comes to the energy stocks in particular? If you're in the energy stocks, is it worth paying very close attention to the price of oil? How is that best navigated? They tend to be a little bit different the way the industries break down. Some are far more sensitive to the price of oil. refineries might not be as sensitive to the price of oil. So, you know, there's upstream, there's downstream, there's fully integrated, there's refiners, there's byproducts. So they tend to act a little bit differently. There's some correlation, but they're not all correlated. Anything else to add contextually just about the energy sector?

8:05Steven Cress:Anything else you would throw in there? Well, also, I mean, it depends, you know, is the environment in a recessionary period? Are interest rates growing, going up? Is it, you know, growth slowing down? Is growth picking up? So energy definitely will react to if you are in a strong economy or a weak economy. You know, if you're in a weak economy, there's not as much demand for gas and oil. So certainly it could be very recession-oriented if the economy has a lot of negative sentiment at the time. And then just to get back to the second part of that question, what do you suggest I do with stocks that go up in price and dividends, but that stay low on their hold ratings?

8:47Yeah, hold does not sell. So there could be many stocks that you buy it and it's a strong buy. The price appreciates. The valuation is not quite as attractive, so it will go to hold. chances are when you bought it at a strong buy, you're getting a higher yield. As that price goes up, the yield goes down. So you've locked in a decent yield. But if the stock is a hold and you still have a good yield on it, it's worth holding on to. The only time I really tell people to sell is if a rating goes to a strong sell or a sell, or if you've had a hold for, you know, an alpha picks, we hold it for 180 days.

9:23And then at that point, we make room for new stocks.

9:26Steven Cress:Okay, this question is about Comfort Systems. Why is Comfort Systems a hold since February 2025 in Quant? It was a buy on Seeking Alpha at$432.10, and it's hit highs of$900 and past$1 ,000 at this point, but still a hold. So I guess they're wondering why it's still a hold if it's seen such great movement. Okay, so the growth for the company has a growth grade of A+. The profitability is an A-, the momentum is an A +, and the revisions grade is an A-, and revisions reflects the number of analysts that are moving their estimates up or down. So that's pretty strong. However, there is an F for valuation, and that is why it's a hold.

10:12Even though the growth is really strong and the profitability is strong, the stock is very expensive. of if you look at it on a PE forward basis, trailing PE is 42 times versus the sector at 21 times. The forward PE is 38 times versus the sector at 20 times. So the PEs are pretty rich. Matter of fact, it's like all Ds and Fs for every valuation metric for EBITDA, EBITDA, EBITDA, price to sales, price to book, price to cashflow. The only place where it has a good grade is actually the peg. And I do like the peg ratio. It's an A minus. Peg ratio is where you combine both growth and the PE. So when you combine those two metrics, it is attractive.

10:58However, those are the only metrics that are in green territory. All the others are in red. So that's bringing it down to an F, hence the whole recommendation.

11:07Steven Cress:Okay. I have one question that was written back in November that is more, I think, tax related. The commenter says they're up over a thousand percent with their CLS holding. I doubled down back in April 2025 during the big tariff scare. It is the largest position in my portfolio. That said, I know that I should rebalance, but I am also considering the tax consequence. I know it's a good problem to have, but is it best to rebalance and pay the tax or hang on? Would not be able to answer that for your client, sorry, cannot provide any advice along those lines. I would suggest that they discuss that with their tax representative.

11:45I will say though, you know, if you find any single position, by example, in AlphaPix, if a stock exceeds a 15 % position, we do reduce it to 10%. We do not, we believe in diversification. If any one particular stock is over 10 or 15%, That's a really big weight. So we scale that back down to about 10 % from 15%.

12:10Steven Cress:And then there's a second part to this question. I'm looking for the quickest, easiest way to tag value versus growth stocks in a portfolio or potentially stock view. I think adding the dividend rate to a portfolio view might be the easiest way, while not perfect, but separating those with dividends and those without. They're wondering if that makes sense to you or if there's other advice that you would give them. Well, not all stocks have dividends and they're looking to examine both value and growth at the same time. Yeah. Yeah. So the best way to do that is to go to the screener. And when you create a screen, you could focus on both value and growth and you can exclude certain grades.

12:50So if you want a stock that has both growth and value, you could say anything that is a factor grade for both of them of B minus or above. And that will give you stocks that possess both growth and value.

13:04Steven Cress:Okay, final question. Educate some of us a little better on quant analysis and what hundreds of metrics assesses in the process. If you could give us an indication of, say, the top five weightings for the following two categories. One, that a CPA would undertake in his classic fundamental analysis of a stock, and those that a CPA would not undertake in their classic fundamental analysis of a stock. For example, stocks sell by transactions. I can't speak to what other people would do, but I can't speak to what we do. When we assess a stock, we basically use something that's very similar to what's called GARP, and that's growth at a reasonable price.

13:43So we're looking for stocks that are collectively strong on value, growth, profitability, momentum, and EPS revisions. Those are the factors that are important to our quant system. Within each of those factors, there's underlying metrics. So by example, if you look at value, you have PE, you have EBITDA sales, you have EBITDA, EBITDA EBIT, price to book, price to cash flow, dividend yield. And we have these for trailing and for forward as well. So we place a weight on most of these. With that said, we have backtested these metrics and some metrics have a higher predictive value in terms of what a stock does in the future than others.

14:26so the weights that we place on those metrics are not equal weighted but we do weight most of the metrics to give us diversification so that would be true for value for growth we would be looking at revenue growth EBITDA growth EBIT growth EPS growth long-term EPS growth the model is both forward and backward looking for growth we use the consensus estimates for those metrics from Wall Street analysts. For historical, we're using what's actually been reported. And for valuation, it's the same. We use historical, looking at TTM. And we look at Ford based on, say, by example, taking the price of a stock over earnings that are forecasted by the consensus earnings that would be forecasted by analysts.

15:13Steven Cress:Steve, you know, I just took a little peek at your top 10 stocks for 2026 article that was just published on Seeking Alpha. And I just did a quick search on whether or not there's any questions that I could throw at you for one more. You want to do one more? Yeah. And I'm not even sure if you could answer this question. This might fall under stock advice. The question is, how would you allocate your money across the top 10 stocks? Would you weight some more than others or different percentages? Typically, what I do is I equal weight the stocks. So when I've bought the stocks in the pass myself.

15:48And it's different for everybody. So that's not advice that I'm giving to anybody, that that's the proper way to do it. Depends on what your risk tolerance is. It depends on how much capital. But if I were doing it, which I will do, and I usually do it after the presentation because I don't like to front run. So last year I waited two weeks after I presented the top 10 and I purchased the stocks. I do it on an equal weighted basis.

16:10Steven Cress:And then what's your holding period? Still holding them. I only sell the ones where they go to sell or strong sell. When we give returns of past returns, is it a year? How much do they go back in time? So we look at it on a yearly basis. So we break it down a couple different ways. So if you're looking at 2023, 2024, 2025, we show what the return was for that year versus the S &P 500. And we also show if you held all the stocks from that period and you continue to hold it. So a lot of times these stocks have strong fundamentals, and even if they're hold, they're worth holding on to. The returns have been good.

16:46So by example, if I was looking at 2024, and you continue to hold the stocks from 2024 to December 10th, 2025, which was last month, the return would be 356 % versus the S &P at 47%. So I campaigned to hold on to it for 2025. The stocks were up 25.68 % versus the S &P up 17%. And if you went back to 2023 and continue to hold the stocks, you would be up 187 % versus the S &P up 85%.

17:21Steven Cress:Much appreciated, Steve. I know that our audience is going to appreciate this Q &A, and perhaps we have set the tone for another one coming down the pike. Any final words that you'd care to leave our audience with this year in quant, alpha picks, PQP, or anything in general? Yeah, I would say, you know, we launched a year off with our top 10 picks. We have a very good track record at doing it. But investing is more than just one month, even though we have an excellent track record. After January, there's February, March, April, May, and so on. And a good investor should be investing on a monthly basis, no matter what the environment is.

17:58if the market seems like it's going to hell in a handbasket or it's going through the roof, you want to stay true to your discipline and keep looking for stocks at those periods, whether it's once a month or once every two weeks that have good fundamentals. Ones to lighten up on are ones where they really appreciate a lot, hit that 15 % position, maybe scale back to 10%, or if the stocks go to a sell or a strong sell, you eliminate it. But a diverse portfolio helps to minimize your risk and maximize your returns. and it's important to do it on a consistent basis.

18:29Steven Cress:Much appreciated. Happy New Year. And for those interested in wanting more info on these picks or on Steve's methodology in general and what he's looking at throughout the year, follow Steve Kress on Seeking Alpha. We'll leave a link to the top 10 stocks for 2026 in the podcast notes and also a link to sign up for Alpha Picks. And if you're a pro subscriber, you get access to the ProQuant portfolio. Steve, talk to you soon. Appreciate this conversation. Thank you so much. Appreciate it. Have a great day. Happy New Year. Just a reminder, anything you hear on this podcast should not be considered investment advice.

19:06This is for entertainment purposes only, and you should seek advice from a licensed professional before investing. If you enjoyed the episode, leave a rating or review on your favorite podcasting app, and we'll see you soon with a new episode.

19:23Thank you.