I’ve Been Getting a Lot of Questions About My Latest Warning

When I came out with my warning of an earnings recession, I think that threw a lot of readers for a loop.

Are you saying to sell?
Are you saying to buy hedges like gold?
What about all the bullish calls you’ve been making?

So, I wanted to clarify that I’m not backtracking on any of that. I’m still as committed to stocks as ever.

I just want investors to understand the situation we’re dealing with.

Heading into this earnings season, dire pronouncements started being made on TV about earnings recession.

Now the talking heads are crowing about all the positive earnings surprises that have come in.

So which is it?

The answer is — both!

While 76% of S&P 500 companies that have reported (as of Friday) were able to exceed analysts’ expectations…that doesn’t mean that the numbers were actually good.

According to FactSet, we’re now looking at a blended earnings decline. That’s a major reversal.

So let’s take a look back at the last earnings recession so you can see what I mean:

Chart:Earnings Recession Can't Stop This Bull Market

As you see, we last had negative earnings for the S&P 500 in 2015–2016, ending in Q3 that year. Well, since then, the S&P’s up 34%.

In fact, we’ve had three earnings recessions since 2009 — and the bull market survived every one.

I think it will this time, too.

That’s not to say there aren’t going to be bad days for certain stocks, like Google (GOOGL) had on Tuesday, and ExxonMobil (XOM) had last Friday.

But with stock-picking systems like mine, you could get any number of chances at huge gains during an earnings recession. They’ll come from the stocks that are still able to deliver monster growth, while others struggle.

I’m proud to say that at Accelerated Profits, our trades in the last earnings recession made:

  • +46% on Hill International
  • +53% on Vimicro International
  • +68% on Empresa Distribuidora
  • +94% on Broadcom

And we did that without options, leveraged ETFs, or other risky strategies. We simply bought stocks that were able to deliver breathtaking growth.

I’ve been at this for 39 years, ever since one of my professors at Cal State Hayward tasked me with building a computer model to mimic the S&P — and my model kept beating it.

My system lets me find stocks that are about to enter a period of “hypergrowth.” A lot of other stocks will double or triple your money over the course of years…but these do it in a matter of months.

Let’s look at a couple examples of stocks that signaled they were about to liftoff, to see what we can learn.

Baozun (BZUN)

Country: China
Industry: E-Commerce – Retail
Buy Signal: April 5, 2017

I said: “In the fourth quarter 2016, Baozun’s sales increased 25.2% year-over-year to $183.3 million, while earnings surged 358.8% year-over-year to $8.8 million. Earnings per share were $0.18 cents, which topped analysts’ estimates by a penny. For the first quarter 2017, the analyst community is expecting 20.2% annual sales growth and 75% annual earnings growth. BZUN is a buy.”

Outcome: BZUN 38% by June, 132% by August

Chart:Baozun Up 132% in 3 Months

Shire (SHPG)

Country: U.K./Ireland
Industry: Pharmaceuticals
Buy Signal: March 26, 2014

I said: “The company is best-known for its strong position in the ADHD market, with drugs like Vyvanse, Intuniv and Adderall XR. In the fourth quarter, the company sales rose 12% to $1.33 billion and its operating earnings rose 36% to $2.26 per share compared with the same quarter a year ago. The company also provided positive sales and earnings guidance, and I want to use the recent dip that we’ve seen in the biotech sector as a chance to add Shire to the Buy List.”

Outcome: SHPG 68% by July

Chart:Shire plc Up 68% in 17 Weeks

SINA Corporation (SINA)

Country: China
Industry: Online Media
Buy Signal: Dec. 20, 2016

I said: “The company operates SINA.com (portal) and SINA.cn (mobile portal) as well as social media network, Weibo.com. During the third quarter, SINA reported a 21% increase in total revenues and a 21% jump in advertising revenues. Income from operations surged 147%. For the fourth quarter, the analyst community is expecting 60% annual earnings growth and 18.6% annual sales growth. Analysts have also revised their earnings estimates 19% higher in the past three months, so another quarterly earnings surprise is likely.”

Outcome: SINA 23% two months later; up 41% from mid-May to June alone

Chart:SINA Corp (SINA) Up 41% in Just 7 Weeks

If you’re like most investors, you’ve never heard much about those companies — if any.

And even when you do hear about hot growth stocks…it’s usually after they make a big move. But, as we just saw, if you can find the right stock BEFORE that next major event…you can make large gains in a much shorter period of time.

Earnings is often the catalyst. So, now’s just the right time to give my methods a try.

How to Find the Market Leaders of 2019

There’s one simple indicator you can use to pick successful investments: money flow.

When a stock attracts a lot of cash from big Wall Street institutions, that’s about the biggest “shot in the arm” it could possibly get. And it’s the best sign that the share price will continue to climb.

So, where is the money going now? Well, the Federal Reserve is still a big factor.

The Fed continues to delay interest-rate hikes — and today, one of its officials even said he would be “open to a cut”!

If rates stay low or turn lower, even MORE money will rush into dividend stocks.

And fundamentally strong dividend stocks pack a one-two punch of share-price appreciation and steady, growing income. Compared to a Treasury bond or bank account, the payouts can be twice or five times the size.

In fact, my Growth Investor service features the crème de la crème of dividend growth stocks. A stock only makes it onto our Elite Dividend Payers Buy List if it passes my stock screen AND my dividend screen — earning my “AA” rating.

They’re the very stocks that are set to enjoy a flood of “smart money” from Wall Street. Check out my full briefing on this phenomenon here.

How to Make Money With Low-Risk Investments

We’ve talked a lot in the past two weeks about when to sell a stock, when to buy a stock and, of course, the importance of fundamentals. By targeting strong earnings and sales growth, you’ll find the right stock that will move higher regardless of which way the broader market turns.

Now, one thing we haven’t talked about is risk tolerance.

Risk tolerance is essentially the volatility you’re willing to take on with each trade. Not everyone can stomach the same level of risk, and not everyone’s investing goals are the same. Maybe you’re saving up for a new car, maybe you’re nearing retirement (or have retired) and want to build your nest egg or maybe you just want to join the investing game. Regardless of why you’re investing, it’s very important to consider your risk tolerance.

I say this because a lot of folks want to make big money fast. So, they turn to very risky trading vehicles like ETFs (exchange-traded funds) or options. Essentially, by buying an ETF, you’re often buying an index. An ETF is a bucket of stocks that can track the major indices, a particular sector or even gold and commodities.

If you’ve invested in an ETF that tracks an index like the S&P 500, you can certainly make good money when the market moves up. However, when the market turns down, the ETF may take a big hit.

Let’s take the ProShares Ultra S&P 500 (SSO) as an example. This ETF tracks twice the daily return of the S&P 500 every day. So, if the S&P 500 goes up 1% one day, then SSO should go up 2%. However, if the S&P 500 is down 2% another day, then the SSO will fall about 4%. Or, if you decide to bet against the S&P 500 and buy a triple inverse ETF, there’s potential for big returns, but only if the market declines. If it moves higher, the ETF will make a big move lower.

SSO SPX Chart

And let’s not forget about options, which are just as risky and require a very high risk tolerance. An option is based on underlying securities like stocks. An options contract offers the buyer the right, but not the obligation, to buy (call option) or sell (put option) the underlying stock during a certain period of time or on a specific date, at an agreed-upon price. That price is called the “strike” price.

One option contract tends to cost about $100, so they are a great way to play expensive stocks. Take Alphabet (GOOGL), for example. The stock is trading at about $1,800 per share. So, in order to own just one share of GOOGL, you have to pay $1,800 (not including trading fees). If you want to own five shares, you’re looking at spending $9,000.

But options are much, much cheaper. You can spend as little as a couple of dollars, and if the stock goes up, the option should go up significantly higher.

However, there is a lot of risk. ETFs and options are extremely volatile, so you need to be prepared for big swings in your investment, and be prepared to lose all of it, very quickly, if they don’t work in your favor.

You should really keep this in mind during earnings season. As we’ve talked about in past blog posts, we’re in an earnings recession now. Many companies – especially large multinationals that are paid in eroding currencies – are set to see a massive deceleration in their earnings due to the strong U.S. dollar and more difficult year-over-year comparisons.

As a result, many analysts have been forecasting negative earnings growth for the S&P in the first quarter, a slight earnings decline in the second quarter and low single-digit growth in the third quarter.

So, going back to the GOOGL example, let’s say you decide to buy call options ahead of the company’s earnings results. If the company does well and reports an earnings surprise, then ideally the stock will move higher.

And depending on the option you buy – and how close its strike price is to the actual stock price – it could make a major move to the upside on just a 1% or 2% move in the stock itself. So you could have a much bigger winner on your hands.

But if the stock falls, then you’re looking at an equally big loss — potentially all of your initial investment in one day. That would have been the case with GOOGL on Tuesday. The company’s earnings of $11.90 per share topped analyst expectations for $10.16, but revenue of $36.34 billion failed to meet the estimated $37.33 billion.

Paid clicks grew only 39% from the 66% growth from a year ago. This means that the company is not growing traffic volumes as quickly to make up for declines in advertising prices. As a result, the stock sold off over 8% the day after earnings (and kept going!) So, had you bought options in hopes of a big move up on positive results, your position could have been wiped out.

GOOGL Chart

The takeaway here is that there’s a lot of risk with options and ETFs. And if you have a low risk tolerance, then you might want to stay away from them.

Now, this doesn’t mean that you can’t make big gains in the short term. You just need to focus on companies with strong fundamentals, sales and earnings growth.  This lowers your risk tolerance significantly, since the odds of a “one day wipe out” are lowered dramatically for two reasons:

1) You’re investing in stocks, and thus you own a piece of the company, which has intrinsic value.
2) These stocks have the underlying fundamentals to continue growing.

And because you’re investing in stocks, you don’t need to worry about any special type of brokerage account or clearance for specific levels. All you do is buy and sell the stock. You can even do it over the phone with your broker if you want to!

For these reasons, I use a stock-trading strategy in Accelerated Profits, and it’s rewarded my subscribers nicely. They’ve locked in double- and triple-digit profits in companies like +37% on Shopify, Inc. (SHOP), +68% on 51job Inc. (JOBS), +75% on Arista Networks (ANET) and +100% on Ferrari NV (RACE).

That was all in less than a year — and the gains were just as good as most options traders can hope to make…but with much greater peace of mind.

My system has been delivering these kinds of results for years, so I expect to continue racking up gains like this. And I’m preparing two new recommendations that offer low risk — but high reward — for tomorrow.

I don’t want you to miss out on my next big winners, so go here to learn more and sign up to receive my Flash Alert.

Tax Cuts and the Earnings Decline

Earnings season is always a mixed bag, and this one is no exception; stocks like Google (GOOGL) are getting hammered, while others like Twitter (TWTR) are getting an earnings surprise boost.

So when I talk about this quarter being an earnings recession — I don’t say that lightly.

Even with 77% of S&P 500 companies posting better-than-expected earnings (according to Friday’s latest figures from FactSet), the actual numbers are still pretty weak:

Overall we’re looking at a 2.3% earnings decline, in aggregate. That’s the worst quarter in almost three years.

And when you look back at the past year, this reversal looks even more significant.

Until now, corporate America has delivered some of the strongest earnings I’ve seen in my lifetime.

Chart:Earnings Growth is Soaring

That’s five straight quarters of double-digit earnings growth…including an amazing 21% in the third quarter.

So what was different then? The biggest driver was tax cuts.

Remember, the Tax Cuts and Jobs Act of 2017 slashed the corporate tax rate from 35% to 21%. That’s billions of dollars, straight to the bottom line of all sorts of companies.

Google saved as much as $1 billion…Disney (DIS) saved $1.2 billion…Comcast (CMCSA) saved $1.8 billion…Verizon (VZ) saved $3.5 billion…and ExxonMobil (XOM) pocketed an extra $5.9 billion, all thanks to the new tax law.

Did companies use their tax savings to invest in the business? Or to raise wages and salaries?

No. Just as I expected, much of it went to investors.

Chart: Comcast's Spending Package

As the Comcast diagram above illustrates, very little went back into the business. Much more went to Comcast employees. But the vast majority — $600 million — went to stock buybacks and a dividend hike.

These companies are not alone. All in all, a record-breaking $1 trillion went into stock buybacks in 2018.

Here’s why: By buying back its own stock, a company can reduce its number of shares outstanding…and thus make its earnings look more attractive.

Remember, earnings per share (EPS) is what everyone looks at. (That’s an easy way to compare companies of very different sizes.)

This chart shows the effect of buybacks on EPS:

Chart: Stock Buybacks Boost Earnings

By buying back 1 million of its shares, this company drove up its EPS by 10% — from $0.20 to $0.22 — even though it didn’t actually earn a penny more.

This is a great situation for its investors, who are getting a greater “bang for their buck.”

But ultimately, unless companies can actually grow their earnings, they can only get so far on tax cuts and buybacks. That’s why some stocks that looked so great are getting hammered now.

Just look at Google: riding high last year, enjoying its extra $1 billion from Uncle Sam — then crashing this week after reporting a disappointing EPS.

So, while I like to see buybacks, I want to see sales growth and earnings growth first. That’s where companies get the cash for buybacks (and dividends) in the first place.

And that’s what’s going to attract more investors…pushing the stock higher over time.

Bottom line: Anytime you’re deciding whether to buy (or keep) a stock, check its earnings and sales growth. My Portfolio Grader makes it simple and easy to do so.

I’m certainly finding good buys on this basis. I’ve already picked 5 new stocks for Accelerated Profits…and I’ll be issuing 2 more buys on Friday.

If you’d like to hear their names — and get full details on the Earnings Recession — go here.

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