And how to take this trading system for a test drive…
Tom Yeung here with your Sunday Digest.
Over the past several months, I’ve introduced several quantitative systems designed to help you compete with even the most advanced Wall Street algorithms.
Some of these tools rely on seasonal effects…
Others rely on price action…
But all of them require fundamental research to confirm their results. There are simply too many real-world variables for algorithms to process alone, which is why human oversight and fact-checking remain critical.
Of course, adding the human factor means results can vary. Some solid wins in this newsletter such as +30% in Cboe Global Markets Inc. (CBOE) have been paired with equally notable misses, like -20% in Enphase Energy Inc. (ENPH).
That’s why Keith Kaplan and his team have taken their research a step further. They’ve developed a system that not only evaluates a company’s fundamental health, but also cross-references what institutional investors are doing behind the scenes.
It’s a powerful blend of technical signals and bottom-up research designed to identify only the highest-probability trades. This strategy, according to research from Keith’s team, would have turned $1,000 into $90 million over the past three decades.
Now, you can watch this system in action at Keith’s free, special presentation on August 14 at 10 a.m. Eastern. Plus, you can even try it for yourself too, completely for free.
All you have to do is click here to get signed up.
In the meantime, I’ve selected three companies that this system is flagging today. And after reviewing the fundamentals myself, I agree. These stocks hit that rare “sweet spot” where institutional momentum, technical trends, and real-world fundamentals are all lining up.
Let’s take a look…
Stock 1: The Hidden Banking Play
These days, it seems like every fintech wants to offer banking services.
- PayPal Holdings Inc. (PYPL) issues prepaid debit cards…
- SoFi Technologies Inc. (SOFI) has high-interest cash management accounts…
- Chime Financial Inc. (CHYM) offers traditional banking services…
But fintechs are not legally permitted to provide banking services without the right banking licenses. Most never try, because these state and federal permits also come with enormous amounts of regulatory compliance and business limitations. A fintech with a banking license that wants to perform a separate fiduciary service, such as managing crypto wallets, must apply for a separate license.
That’s why companies like The Bancorp Inc. (TBBK) exist.
The Bancorp is a nationally chartered, FDIC-insured bank that specializes in offering banking services to fintech firms. When you apply for a debit card from PayPal or open a checking account on Chime, you’re actually doing business with The Bancorp. The fintech firms only act as a final layer on top.
That’s turned The Bancorp from a sleepy South Dakota-based bank into a national high-growth, high-return financial institution. Pretax profits surged from $80 million in 2020 to $217 million last year, and analysts expect that figure to grow another 73% to $376 million by 2026. Its return on equity sits at 22% – twice as high as industry norms.
Keith’s screener views TBBK as a near-perfect investment. The firm earns a 70.8 fundamental score and a 76.5 technical score. Its combined score of 74.1 sits in the perfect “sweet spot” of investment.
At least one TBBK insider has also been buying shares, a historically bullish sign. Over the past three weeks, director Matthew Cohn and his wife have bought TBBK shares in three separate transactions.
Now, it’s essential to note that The Bancorp is still a commercial bank. Poor underwriting or macro stress can spark loan losses and trigger a liquidity crisis. Shares trade at just 12X forward earnings as a result.
However, that also means significant upside for TBBK if all goes well. Fintech firms are rapidly expanding into banking services, which means this hidden partner could see its stock more than double in the years ahead.
Stock 2: The Other Palantir
Regular Sunday Digest readers will know that meme stocks make me very nervous. Most retail investors forget the second half of the saying “easy come, easy go,” and losses from these high-priced stocks have wiped out retirement portfolios.
That’s true for even the most respected names in AI. Consider Palantir Technologies Inc. (PLTR), a top-tier data analytics firm with roughly 50% retail ownership. As Morningstar analyst Mark Giarelli noted in an investor letter last week:
We love the company, but believe valuation is a major headwind, going forward.
So, how can investors tap into cutting-edge AI companies like Palantir without paying 100X sales?
According to Keith’s screener this week, one answer is Dynatrace Inc. (DT).
Like Palantir, the Boston-based company is a big data software firm that uses AI to help enterprises manage, analyze, and use their data. Also like Palantir, it’s deeply embedded with corporate clients; net retention rates have remained above 120% since 2019.
The company is also benefiting from rising adoption.
Best of all, this full-stack monitoring firm is trading at a reasonable valuation relative to its growth. The company trades at just 30X forward earnings and 9X sales, valuing it less than half of its key pure-play competitor, Datadog Inc. (DDOG), and a 10th of Palantir. A recent 7% sell-off (despite posting a 12% earnings beat on August 6) only makes Dynatrace more compelling.
Keith’s screener awards DT a solid 62.1, placing it comfortably in the “green zone” of buying. So, while Dynatrace might not have the speculative sizzle of Palantir, it offers investors far better downside protection while maintaining excellent upside.
Stock 3: A Second Chance at AI
Back in February, I recommended shares of Duolingo Inc. (DUOL), an ed-tech innovator that had “cracked the code” of integrating AI into real-world learning:
Duolingo has successfully brought AI into the classroom… and it’s seeing the financial results. In its most recent quarter, paid subscribers rose 47% from the prior year to 8.6 million. Revenues increased 40%, while net income surged eightfold to $23.4 million. You might even have friends or family who excuse themselves to sign into Duolingo to “keep their streak alive.”
My timing could have been better.
Just weeks later, President Donald Trump unveiled “Liberation Day” tariffs exceeding 40%, sending shockwaves through the market. Growth stocks sold off sharply, and Duolingo’s shares fell almost 40% from peak to trough.
Fortunately, the company’s AI-powered fundamentals remained intact. Shares would recover through May, and the stock surged 30% this week after the company announced blowout second-quarter earnings:
- Daily active users climbed 40% to 48 million.
- Revenues increased 41% to $252 million, beating Wall Street forecasts of $241 million.
- Net Income rose 84%.
- Guidance was raised. Full-year sales are now expected to hit $1.02 billion.
It was a resounding confirmation that Duolingo’s AI-driven strategy is working.
Keith’s screener believes there’s still time to get in.
Since those Q2 earnings were announced, the system has upgraded DUOL to a score of 63.8, placing it within the “buy zone.” It’s a second chance for investors who missed the first upswing, and an opportunity for those looking to double down.
However, be sure to continue monitoring DUOL with this screener, because institutional investors will often unload hypergrowth firms at the first sign of trouble.
The Silent AI Revolution
Years ago, one of my friends settled down in the Tampa region. The city had many of the elements that made Miami desirable and came without the sky-high price tag of its more popular rival.
Since then, Tampa has done incredibly well. Its real estate market didn’t suffer the same steep sell-off that high-flying cousin did during the 2008 financial crisis (even though it did decline), and prices have risen threefold since. It’s more than kept up with Miami’s 2010s resurgence. The Gulf Coast city has since been named among the top places to live (Clever Real Estate) and do business (Financial Times).
In a very real sense, Keith’s screener’s three picks this week are much like the “Tampa” of artificial intelligence. These high-performing firms are all using AI to notch phenomenal growth rates… and are priced without the same eye-watering premium of hotter AI names.
That’s the beauty of Keith’s screener. It’s programmed to find the highest-probability opportunities, not chase headlines.
To give you a better sense of how the system works, Keith will host a special presentation on August 14 at 10 a.m. Eastern where he will be joined by a special guest.
Click here to reserve your seat for Keith’s free event and learn how his system can help you 5X the performance of the stock market… Tampa style.
I’ll see you here next week,
Tom Yeung, CFA
Market Analyst, InvestorPlace
