It’s Friday, folks! But it’s also a Friday heading into a long holiday weekend. And that’s why we saw the recent broader market selling intensify today. The reality is that much of Wall Street and Europe is on holiday. And because of the long Labor Day weekend, professional traders like to clean out their inventory ahead of a big weekend.
What’s important to note here is that the selling volume is light, which is good news. If the market was declining on high volume, then it would signal a selling panic. Thankfully, that’s not the case, and we’re simply dealing with some late summer shenanigans.
Now, I’m sure these oscillations have left many investors’ heads spinning, but I assure you there isn’t much to be concerned about right now. In fact, I view the current weakness as an excellent opportunity to pick up fundamentally superior stocks on dips.
At the same time, buying stocks is a little bit treacherous right now, as it’s like buying a falling knife. So, you get cut, but high-quality stocks bounce back big time. It’s why I like to say that bad stocks fall like rocks; good stocks bounce back like fresh tennis balls.
So, it’s simply a matter of making sure you’re invested in the good stocks.
However, this can be easier said than done, especially when you have literally thousands of stocks to choose from. It also doesn’t help when financial media heads try to “hype” bubble stocks like Tesla (TSLA) or companies that really don’t have the staying power to make folks money over the longer term.
So, in today’s Market360 article, I’d like to share my investing tips to make sure you’re investing in stocks that will set your portfolio up for the long haul.
1. Invest in high margin companies that dominate their business. A company that’s able to expand its operating margins is usually a company that has a dominant position – such as a monopoly – in its industry. This company can raise prices without seeing a drop-off in sales, and that’s a nice place to be.
Case in point: The Clorox Company (CLX). Its products have been flying off the shelves during the coronavirus pandemic. You may have noticed that Clorox household wipes and other cleaning products haven’t been available at most stores, as individuals and businesses are striving to disinfect everything in an attempt to kill the coronavirus on surfaces.
Thanks to continuing demand for cleaning products during the coronavirus pandemic, sales jumped 22% year-over-year to $1.98 billion, which beat forecasts for $1.87 billion.
Fourth-quarter earnings increased 28% year-over-year to $310 million, or $2.41 per share, up from $241 million, or $1.88 per share, in the fourth quarter of 2019. That topped analysts’ estimates for $1.99 per share by 21.1%. For fiscal year 2020, Clorox also announced earnings of $7.36 per share, or 16% annual earnings growth, and 8% annual sales growth.
2. Along these lines, companies that have margin expansion tend to post bigger earnings surprises. Zoom Video Communications (ZM) is a good example here. Second-quarter earnings of $0.92 per share walloped analysts’ expectations for $0.45. So, ZM posted a stunning 104.4% earnings surprise. The stock surged more than 40% on the news before pulling back a bit amid the broader market selling later in the week. (I’ll talk more in-depth about ZM’s earnings in tomorrow’s Market360 article, so stay tuned!)
3. Invest in companies with strong forecasted sales and earnings. Do you really want to buy stock in a company that’s expecting its growth to slow? As sales and earnings dwindle, so will Wall Street’s interest in the stock. You want to invest in companies that are expecting to be even bigger and better quarter after quarter. Ultimately, these are the ones that will see an increase in institutional buying pressure as Wall Street flocks to the high-quality stocks. And, as that buying pressure increases, so will the stock price.
I am a stickler about this in all my newsletters. In Growth Investor, my stocks are characterized by 65.4% average forecasted earnings growth and 45.8% average forecasted sales growth. In Breakthrough Stocks, my Buy List stocks are characterized by 39.7% average annual sales growth and 325.1% average annual earnings growth. And, in Accelerated Profits, my stocks are characterized by 38.8% forecasted sales growth and 139.8% forecasted earnings growth.
4. Look for companies that see positive analyst revisions in the past three months, as these typically post earnings surprises. CyberOptics Corporation (CYBE), one of my Breakthrough Stocks, posted a stunning 214.3% earnings surprise in its most-recent quarter. And since it’s expected to benefit from the move to 5G networks, analysts are expecting this to benefit CYBE’s top and bottom lines in the third quarter. Currently, analysts are expecting earnings to surge 640% year-over-year to $0.27 per share, up from an earnings per share loss of $0.05 in the same quarter a year ago. Analysts have also increased earnings estimates by 285.7% in the past two months, so a third-straight quarterly earnings surprise is likely.
5. If you’re a dividend investor, focus on companies that are consistently raising their dividends. You want to be sure you’re investing in dividend stocks that have the ability to increase their dividend payments. I check this by looking at the company’s last four dividend payments. Are they increasing? Are they decreasing? Are they staying the same? Decreasing dividend payments are a bad sign (it often means the company isn’t doing well), and you want to avoid those stocks.
Dividend stocks tend to zig when the market zags, which can help smooth out your overall portfolio turns. This is partly why the Dow has held up better than the S&P 500 and NASDAQ these past two days. Investors searching for yield are turning to dividend-paying stocks. This is also a sign that money is not leaving the market, it is simply being reshuffled.
Where to Invest First
For all investors, old and new, my Portfolio Grader and Dividend Grader are great tools to keep in your back pocket. You simply plug in a stock you like and it will automatically grade that stock for you. An A-rating is a “Strong Buy, a B-rating a “Buy,” a C-rating a “Hold,” a D-rating a “Sell,” and an F-rating is a “Strong Sell.” You’ll know right away whether the stock you’re interested in is one worth buying or one you shouldn’t touch with a ten-foot pole.
If you’re not sure of where to invest, I encourage you to check out my Platinum Growth Club. I recommend over 100 stocks across all my services – Growth Investor, Breakthrough Stocks and Accelerated Profits – which vary from dividend stocks to large-cap stocks to small-cap stocks. You also have exclusive access to my Model Portfolio. These are the crème de la crème of stocks from my services, all handpicked by me. I also offer an Allocation Tool, which will help you allocate your stock portfolio based on your risk tolerance.
But the truth of the matter is that now is the time to get your portfolio ready, as I expect the fundamentally superior stocks to take off soon. Quarter-end window dressing and the ETF realignment is just around the corner, and I expect my stocks to start firing on all cylinders as money managers try to make their portfolios “pretty” during the quarter-end window dressing.
My subscribers have the odds in their favor with stocks with phenomenal sales and earnings growth. Join Platinum Growth Club today so you do, too.
P.S. Our InvestorPlace offices and the customer-service phone lines are closed on Monday, September 7 along with the stock exchanges, for the Labor Day market holiday. I’ll be back tomorrow and then again on Tuesday, September 8 with my next Market360 article.
Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owned the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
The Clorox Company (CLX), CyberOptics Corporation (CYBE), Zoom Video Communications, Inc.