Why It’s Going to Get Harder to Pick Stocks

In an exclusive live chat event with my Platinum Growth Club subscribers on Monday, we talked a lot about my thoughts on the market right now.

Now, I hate to be a party pooper, but I revealed that the market is overbought.

We’re already up 21% from the December low for the S&P 500. However, only four of the 11 sectors in the S&P 500 are supposed to have positive earnings next quarter:

  1. There’s healthcare; those earnings should be about 5.3%.
  2. Then the utilities are supposed to have earnings of 2%. But that’s all because we’ve had severe winter weather in much of the U.S.—so gas bills are up.
  3. And materials are up there, too.
  4. Industrials as well…but that’s just fractional earnings growth.

You’ll notice that the tech sector is not on the list. But the tech sector has been driving the market recently due mostly to indexing. All those chip stocks that they wanted to “sell, sell, sell” last year, they’re now buying. But ironically, a lot of those chip stocks don’t have earnings growth.

And chip stocks are just one example. The reality is that we’re facing more of a “special situation market,” and less of a “sector market.”

As any market climbs higher, it chases fewer and fewer stocks. You can think of the market like a funnel. The market will no longer be chasing tech and other hot sectors. Instead, it will have a more narrow focus.

In this environment, you want to have a good set of tools in your back pocket to help make sure you’re invested in the stocks where money will be diverted to. That’s why my Portfolio Grader and Dividend Grader are two stock systems that you want in your toolkit.

Let me show you what they can do for you. We’ll use Netflix, Inc. (NFLX) and Apple, Inc. (AAPL) as examples. These companies made headlines this week after Apple announced that it will be launching its own video streaming service, an area of the market that Netflix has dominated.

So, with any stock, there are two critical characteristics I look at.

The first is strong fundamentals. By that, I mean sales growth, earnings growth and the like. Growing companies are companies that are healthy and thriving. They have smart leaders who know how to run and manage a smart business. If a company is struggling to sell its products or is spending more than it makes, it’s not a company that you want to own for growth.

The second characteristic I look for in any great stock is strong buying pressure. Think of this as “following the money.” The more money that floods into a stock, the more momentum a stock has to rise. And there’s no doubt about it, we all want to buy stocks that rise!

I built these into my Portfolio Grader to rate stocks on those factors. All you need to do is plug your stocks into the tool and Portfolio Grader will conduct a thorough analysis.

In fact, once it’s done “crunching the numbers,” Portfolio Grader gives your analysis an easy-to-interpret A to F letter grade.

Here’s what it says for Netflix now:

The Quantitative Grade of “B” shows you that NFLX stock is experiencing good buying pressure.

The Fundamental Grade of “C” isn’t as good. While Netflix is seeing good sales growth, has turned in positive earnings surprises, and is giving shareholders a very nice return on equity — its operating margin, cash flow and earnings momentum aren’t so hot.

Now, overall, NFLX stock received a “B” rating from Portfolio Grader. The reason why is simple: The Quantitative Grade is more heavily weighted than the Fundamental Grade.

Fundamentals are important, but in my experience a stock’s current level of buying pressure is the single-most important variable when determining a stock’s health. This is what the Quantitative Grade measures, and this is why NFLX is considered a B-rated “buy.”

In fact, members of my Accelerated Profits service have benefited from Netflix’s strength over the past two years. We’re currently sitting on a 134% gain since I recommended the stock in May 2017.

Apple, on the other hand, has a C-rating in the Portfolio Grader:

While its overall Quantitative Grade and Fundamental Grade match Netflix’s, that’s where the similarities end.

Apple actually receives lower marks for earnings momentum and earnings surprises.  Both of these are very important to a company’s fundamentals, which is why Apple has a lower rating. (If you’d like the full analysis, you can sign up here!)

Interestingly, AAPL earns a much better rating than that from Dividend Grader.

With dividend stocks, there are four factors that I look at, and that’s what’s behind the Dividend Grader score. Here they are:

AAPL stock’s Dividend Trend is quite strong. What I look for in dividend stocks is their ability to consistently increase their dividend payments. So, this grade looks at the last four quarters of payments to see if the payments are growing, unchanged or decreasing. In AAPL’s case, the dividend has grown nearly 5%.

Dividend Reliability is good, too, as AAPL has been paying dividends for 26-consecutive quarters. Forward Dividend Growth is strong, with an annualized 2.97%.

And the fourth rating is Earnings Yield. This is one measure used to help gauge earnings quality. A higher positive number can indicate future dividend increases or at least companies with the ability to pay dividends. A falling or negative earnings yield can indicate a lower likelihood of future dividends or possibly a dividend cut. But AAPL stock has a good outlook here, too.

I mention all this because before I recommend any stock for my Elite Dividend Payers Buy List at Growth Investor, it has to have an “AA” rating.

In other words, the stock has to earn an “A” Dividend Grade…and it has to have strong enough fundamentals — but especially strong enough buying pressure — to earn an “A” from Portfolio Grader.

I’ve nicknamed these “Money Magnets.”

Given the tricky market we’re heading into, I highly recommend you plug your holdings into my Portfolio Grader, and see how they measure up.

And I’m eager to share my OWN findings as well. So, I’ve put together a briefing that would normally be available to clients only. If you’d like to see where the smart money’s going now, click here.

More Louis Navellier



RSS Feed

Little Book

InvestorPlace Network