The Trap That’s Being Laid for Value Investors

If you’ve ever seen sports reports or interviews with athletes, you know all about this: When a team wins, they attribute their success to their efforts as individuals and as a team. You’ll hear all about how special the group is, how individuals worked harder than anyone else and were destined for success.

If, on the other hand, a team fails, it’s often the fault of … the officials.

This type of thinking happens a lot, in many aspects of life. But a potentially fatal side effect of this all-too-human trait is what happens when we get good results from bad decisions: We do the same thing again, usually to a bad outcome.

When we fall into this trap as investors, not only do we lose money; we lose the time we might have spent making improvements in our portfolio.

It’s a tendency that behavioral finance experts call Self-Attribution Bias.

And I mention it because I think the market is going to become much more “narrow” than it is today. (In other words, some stocks will perform well; others simply won’t.) So let’s talk about how to get on the right side of that…and the trap that you should avoid.

“In the short term, the market is a popularity contest; in the long term it is a weighing machine.” That’s a quote from one of the greatest investors of all time, Warren Buffett.

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. But that’s not to say that its stock won’t temporarily do well. It may do very well…due to, for example, a “short-covering rally” – like we saw in Tuesday’s session.

Specifically, the bottom 50 stocks in the S&P 500, the bottom 10% with the worst year-to-date performance through last Monday, popped 20.87% on Tuesday. That’s stunning. And value investors who had thought those stocks were a good buy, they may have felt vindicated.

But the truth is, a lot of other investors had been short-selling those very stocks. And at a certain point, the broker is going to do a “margin call,” and you’re going to have to “buy back to close” that short stock position.

Goldman Sachs (GS) analysts like to track the most shorted stocks, and Bloomberg reported that “at noontime in New York” on Tuesday, this group was “on track for its best day since 2012.” We’re talking about stocks like Beyond Meat (BYND), the fallen IPO darling of 2019, and Bed Bath & Beyond (BBBY).

By Wednesday, Bloomberg also reported that value stocks had their “best five-day run this century.” BBBY is at a forward price-to-earnings (P/E) ratio of roughly 10:1. So, should you buy?

Well, before you do, take a look at BBBY’s Report Card in my Portfolio Grader:

That’s based on data from my latest Saturday scan, in which BBBY gets a “C” for its Quantitative Grade. That’s largely a reflection of institutional buying pressure. So, it may very well improve with more days like Tuesday.

But take a look at those fundamentals. They’re a mess. And unless that “F” for Analyst Earnings Revisions gets a lot better, fast, then it doesn’t bode well for Bed Bath & Beyond’s earnings report.

Overall, BBBY is a “Sell” in my Portfolio Grader. If you own anything that rates a “Sell,” I’d keep an eye out for earnings whispers and possibly the chance to, at least, sell into strength.

I share Buffett’s dedication to fundamentals. He became one of the all-time greats not by chasing capital gain – but by owning quality companies that can generate earnings.

Growing companies are ones that are healthy and thriving. They have smart leaders who know how to run and manage a smart business. I don’t let any other stocks into, for example, my Platinum Growth Club Model Portfolio.

And I very much expect for us to be rewarded for that when the stock market does become narrower.

Now, narrowing did happen at times during the 10-year bull market as well. We’ve weathered “earnings recession” and all sorts of scares before. And by sticking with my system, we found the best-of-the-best stocks.

I’ll keep recommending that to anyone who will listen. And as a result, I’m confident in expecting 45 double- or triple-digit winners in 2020. Not just because we had that in 2019, a year of all-time highs. But because we had even MORE of them in each of the 15 years previously.

One way you can do that is with a healthy weighting in AA-rated stocks. These are stocks that are an A-rated “Strong Buy” in both my Portfolio Grader AND my Dividend Grader tool.

Looking back at Tuesday’s session, the 50 highest-yielding stocks in the S&P 500 popped 16.69%. So, when I talk about strength in the market, that’s really the strength I’m seeing.

Really, the dividend stocks took off last Thursday; that’s when the Fed wrestled to control the Treasury bond market, keep yields down. They’re still down (so that’s good) thanks to all that quantitative easing and open market intervention the Fed was doing. So, I feel good that we’re in the midst of a great dividend rally.

Even today, in a broader rally, the Dow beat the Nasdaq because everybody’s still chasing yield to this day.

I still expect the dividend stocks to simply lead us out of this mess – and for growth stocks to follow.

Right now, the crème de la crème is already doing well, because of quarter-end window-dressing. I expect more buying pressure on Tuesday, March 31, when exchange-traded funds (ETFs) rebalance.

Then in April, we’ll see what the analysts have to say. If the analysts become party poopers, I’m going to become a party pooper. If we see positive estimates, we’ll know which stocks to buy.

If you’re a growth investor who’d like to follow my lead, then wait for the earnings to come out in April. Good stocks will bounce, as they always do. If they don’t…then a good earnings report should give you the chance to sell into strength.

Note: I’ll be fine-tuning my Platinum Growth Club Model Portfolio accordingly. So, if you try us out now, you’ll get that hand-picked list, plus invites to my VIP Chats. (I’ve also been recording podcasts constantly in this crazy market for subscribers to Platinum Growth Club and ALL my services.)

Click here to learn all about Platinum Growth and how we find great stocks – even in corners of the market you wouldn’t think to look.

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