Stock Portfolio Updates: Exiting Free Lunch & Selective Buying By: Christopher Mistal | February 13, 2025 | Email | Print

With each passing inflation data point, it is increasingly looking like the Fed was overly aggressive with cutting its key lending rate last year. Yesterday’s Consumer Price Index (CPI) report was hotter than expected with headline and core readings above estimates. Today’s Producer Price Index (PPI) was also higher than forecast but was largely shrugged off as some details of the report apparently suggested a more benevolent inflation outlook. Perhaps, but with headline CPI at 3.0% and PPI at 3.5% year-over-year, both are well above the Fed’s stated 2% target.

 

From a historical perspective, above average inflation metrics for the month of January do not appear to be all that uncommon. Using monthly percent change in CPI and PPI from 1947 to present broken down by month, we find January’s average CPI reading to be the third highest, behind June and September. January PPI readings have on average been the largest. Please note, we used the “All Commodities” PPI from the St. Louis Fed Fred database as the current PPI “Final Demand” only dates back to late 2009.

 

 

Without going too deep into the differences between the two PPIs, the newer Final Demand version apparently measures price changes for goods, services, and construction sold for personal consumption, capital investment, government, and export while the older All Commodities generally captures pricing data along various steps in the production process. Given a choice, the older version is likely a better indicator of where prices are likely headed at the consumer level.

 

The final inflation metric Personal Consumption Expenditures (PCE), due out later this month on February 28, is reported to be the Fed’s preferred inflation gauge. Based upon its historical average monthly change in January, and the higher-than-expected readings for CPI and PPI, we would not be surprised if PCE was also hotter than current estimates.

 

 

If that is the case, then more of the same choppy but still generally higher trading we have been experiencing is likely. Market expectations for the next Fed rate cut have already adjusted out to September based upon the CME Group’s FedWatch Tool today. The Fed is likely going to be keeping rates higher for longer, but we do remain bullish for full-year 2025 and our Base Case scenario is in play with full-year S&P 500 gains in a range of 8-12%. 

 

Should S&P 500 hold onto its gains this month, odds further improve as its historical performance after a positive January and a positive February has been quite solid with just one fractional loss in 32 years since 1938 and only two declines in the last 10 months of the year.

 

 

 

 

Small cap stocks have not been able to hold any positive momentum during their current seasonally favorable period. Inflation and 10-year Treasury bond yields continue to be a dark cloud overhanging the market and small caps in particular. Our Small Cap stocks are mixed. Older holdings have been holding up, like Navigator Holdings (NVGS) and Mama’s Creations (MAMA). NVGS has been relatively quiet while MAMA has traded in its usual choppy manner, but remains our best small-cap, up 101.1% since addition. NVGS and MAMA are on Hold. Willdan Group (WLDN) has not fared as well and was stopped out on February 3 when it closed below its stop loss.

 

Healwell AI (HWAIF) is down about 16.4% as of today’s close, most likely due to the dilution associated with the private placement financing deal to acquire Orion Health. When all the units and warrants are exercised it will add 100 million shares to the float. The warrants are not exercisable for 3 years and at a price of $2.50 per share. This brings total fully diluted shares outstanding to 331.8 million and the market cap to $388.2 million.

 

The Orion deal is expected to close April 1. Orion is a considerably larger operation than Healwell and in addition to adding a host of technological synergies, Orion will add $100 million in annual revenue and $20 million to the bottom line, keeping the company on track to profitability this year. Healwell currently reaches about 20 million patients, the Orion acquisition adds over 150 million patients.

 

Orion also increases the company’s commercial footprint with its 20-year history of operating with public and private healthcare systems around the world. It provides a beachhead in the USA into several mid-tier healthcare systems in the West and Midwest as well as several longstanding partnerships in Saudi Arabia, UAE, the UK, Ireland, Scotland, Spain, France, Australia and New Zealand, including several NHS locations in England, Northern Ireland and Scotland.

 

In addition, Healwell’s Pentavere recently published a study in the Journal of Liquid Biopsy, validating DARWEN AI as a leading artificial intelligence clinical decision support tool in oncology. The study found that the DARWEN AI platform achieved a 100-fold improvement in time savings versus traditional manual processes. Buy HWAIF at current prices with a Buy Limit of $1.25.

 

In anticipation of further volatile and choppy trading, potentially throughout the balance of February, we have put every position in the Mid Cap and Large Cap sections of the portfolio on a buy, except Leonardo DRS (DRS). A possible end to conflict in Ukraine could temporarily knock defense stocks down. Should this happen to DRS, we have raised its stop loss. DRS is on Hold.

 

Sterling Infrastructure (STRL) did close below its stop loss today. We are not going to close this position out instead we are going to implement a new lower stop loss. The recent sell-off in construction and infrastructure companies looks way overdone with technical indicators near or at oversold levels.

 

If you do not have an existing position(s) or are considering adding to an existing position(s), any additional February weakness could be considered an opportunity to do so.

 

 

Our Free Lunch stocks had been performing reasonably well considering broader weakness exhibited by the Russell 2000 small-cap stock index. There also have been few signs of a typical “January Effect” of small-cap outperformance (pages 112 and 114 of the 2025 Almanac) so far this year. Without the “January Effect,” Free Lunch stocks have struggled. Not to mention the negative impacts of the 10-year Treasury bond yield remaining stubbornly elevated. As of the close on February 12, the entire Free Lunch portfolio was down 2.9%. Ten of the original 26 stocks have been stopped out and ten are still showing a gain. PBF Energy (PBF) closed below its trailing stop loss today and will be closed out on February 14.

 

As detailed on page 116 of the 2025 Almanac, and in the Free Lunch email Issue from December 21, 2024, the time has arrived to close out all remaining Free Lunch positions. Performance has been deteriorating since around early/mid-January and today’s laggard Russell 2000 performance further suggests it is time to move on. Sell all remaining Free Lunch stocks. For tracking purposes, all remaining Free Lunch stocks will be closed out of the portfolio using their respective average daily price on Friday, February 14.

 

Please see the table below for updated advice, stop losses and buy limits where applicable.