It’s time to look ahead to June. While I hope that you’re able to get out and about in the warm, fresh air, there are some investing actions to take first.
Since the days seem to be crawling by and, somehow, also flying by, let me remind you: We’re coming up on the end of the second quarter.
This is a time when fundamentally superior stocks step into the spotlight. Here’s why: Many institutional investors will shore up their portfolios before the end of June. Smart beta and equally weighted ETFs are also rebalanced every 90 days.
This quarter-end “window dressing” creates forced buying pressure in the best-performing stocks from the quarter. In other words, companies with strong forecasted earnings and sales growth will attract a lot of attention in mid-June, and their shares will bounce higher.
That’s why I’ve been so active with buy and sell alerts this week in my newsletters like Accelerated Profits, where I just recommended two brand-new stock picks.
Here’s the flip side of that coin: Not every company can maintain the earnings momentum that Wall Street will demand from stocks going forward, as the market continues to “narrow.”
In fact, according to FactSet, the S&P 500’s second-quarter revenue is forecast to drop 11.5% on average. Second-quarter earnings are now expected to plunge 42.9% on average!
My Accelerated Profits stocks are a sharp contrast to that. The supercharged growth stocks I’ve been finding are characterized by 21.7% forecasted sales growth and 101.4% forecasted earnings growth. Any money manager is going to look at that relative strength – and create intense buying pressure in those stocks. (While leaving other companies in the dust.)
And obviously, I’d like to maintain those stats. So, given slowing earnings momentum and lowered analysts’ estimates, I recommended that we book our triple-digit gain in Paycom Software, Inc. (PAYC) yesterday for Accelerated Profits and a few other portfolios.
Paycom Software might sound familiar to you, too, if you’ve been following me here in Market360. In January I shared that PAYC had been called up to the “big leagues”: the S&P 500. As recently as April 29, PAYC was surging on a first-quarter earnings beat.
Well, again, this is the second quarter now!
To help put you on the right side of the significant rotation I expect here in June, I’d like to share exactly why I decided to cut PAYC loose – and take our 260% profit off the table.
I still think that Paycom Software has a “great business model,” which involves cloud-based management systems for the complete employment life cycle, including recruitment, hiring, termination and retirement, as well as payroll.
But when you look at PAYC’s latest Report Card in my Portfolio Grader, there are some warning signs:
Paycom’s Cash Flow is looking mediocre, coming in with a “C” grade. Now, I used to do corporate accounting; that is why you never see bank stocks in my portfolios, because I know all about their “creative accounting” practices. For instance, if you take two money-losing subsidiaries and merge them together, sometimes they can earn money. Many companies can still portray themselves as “profitable” – but the cash flow never lies.
Until now, many companies could slide by without a huge “rainy day fund.” Now that we’re in a global recession, and many customers are cutting expenses or unable to make payments, companies need a strong cash position.
But PAYC also gets a “C” for Earnings Surprises…and a “D” for Earnings Momentum.
Looking forward, Paycom Software is among those companies who are suffering the fallout from the coronavirus pandemic. Many businesses have reduced staff and operations, which has limited their need for Paycom Software’s products. As a result, the analyst community has lowered their second-quarter earnings forecasts by 21.6% in the past week alone. Second-quarter earnings are now expected to dip 8% year-over-year.
This was my cue to recommend exiting PAYC.
Now, it’s not always easy to say goodbye to a strong winner…particularly when it still technically rates a “Buy” in Portfolio Grader.
But, if I leave you with one piece of advice, let it be this: Never “fall in love” with stocks. They simply cannot love you back. And there’s no reason they can’t turn on you, when the underlying fundamentals start to go south.
The bottom line is, we’ll be taking our capital like the 260% profit in PAYC – and deploying it into more exciting stocks, like the ones for The Accelerated Income Project.
Note: On Thursday, I released two new buys for Accelerated Profits: a tech manufacturer and a diagnostics company. They may sound very different – but crucially, both have the fundamentals required to keep them firing on all cylinders.
Both companies have been beating expectations and seeing Wall Street analysts revise future expectations higher. This is a reliable signal of a big stock surge – and I don’t want you to miss out.
Between the glimpse at this stock-picking methodology and potential access to its hottest stock picks, you’ll want to see what I’ve shared in my Accelerated Income Project presentation.