Last week, I wrote “it’s time to take a step back, breathe deep, and objectively identify money-making opportunities,” and I reminded investors that “if you were in cash during the top 10 best days in the stock market over the past 20 years, then your overall return is half what it would’ve been otherwise, according to JPMorgan.”
This week, stocks rallied off a margin-call inspired low following changes to margin requirements at many brokers late last week, monetary and legislative intervention, and hopes for global “helicopter-money” style support. The shift in overnight risk from being long to being short has been palpable, prompting the question: Is the stock market rout over?
While successfully holding 2018’s low is encouraging (see following chart), bottoms usually don’t produce “V-shaped” rallies to new highs. Instead, they include fits and starts, exposing investors to the risk of whipsawing portfolio values.
Given the economic data ahead is likely to be brutal, quarter-end statements are likely to be scary, and there’s still Covid-19 headline risk, selective stock picking and prudent risk management are critical in the coming weeks.
Instead of chasing returns and succumbing to portfolio churn, concentrating on the best sectors, industries, and individual businesses is best. Furthermore, patiently timing entries from here and avoiding margin until there’s more clarity to avoid forced liquidation remains wise.
The best sectors now
Top stocks within the best sectors often enjoy tailwinds that can boost performance, so paying attention to shifting sector leadership can pay off. For this reason, we use a scoring system that ranks sectors by market cap every week.
We explain our approach more here, but in short, we assign a score to over 1,500 widely-traded stocks using a 7-factor methodology, then we aggregate individual stock scores by sector and industry to rank them.
The seven factors are:
- Forward earnings growth expectations,
- Historical trends in reporting earnings that beat Wall Street estimates,
- Insider buying,
- Short-term and long-term institutional money flow,
- Forward valuation relative to historical valuation,
- Contra-trend short interest analysis, and
- Quarterly seasonality over the past decade.
Currently, the best large-cap sectors are healthcare, industrials, consumer goods, and services. The top mid-cap sectors are services, technology, consumer goods, industrials, and healthcare. And the best small-cap sectors are services, consumer goods, industrials, and REITs.
Fishing in these ponds for top stocks should increase the odds of finding winners.
Source: Top Stocks For Tomorrow.
The best stocks to buy
Instead of heroically trying to pick individual stock price bottoms arbitrarily, our approach helps investors manage risk/reward by focusing on top stocks when the odds of winning are high.
This thinking is supported by the fact that stocks historically follow earnings over time, insiders only buy for one reason; money flow reflects institutional optimism or pessimism, and seasonal patterns often rhyme.
Currently, the number of top stocks we’re recommending in our marketplace service is limited as we wait for conviction, but these are the best scoring stocks, by market cap, that are worth adding to your watch lists.
LG CAP | 3/19/2020 | 4 Week MA | |||
Company Name | Symbol | Sector | INDUSTRY | SCORE | SCORE |
BEST | |||||
The Clorox Company | (CLX) | CONSUMER GOODS | HOUSEHOLD & PERSONAL PRODUCTS | 100 | 103.75 |
Molina Healthcare, Inc. | (MOH) | HEALTHCARE | HEALTHCARE PLANS | 100 | 86.25 |
Masimo Corporation | (MASI) | HEALTHCARE | MEDICAL INSTRUMENTS & SUPPLIES | 95 | 92.5 |
Regeneron Pharmaceuticals, Inc. | (REGN) | HEALTHCARE | BIOTECHNOLOGY | 95 | 98.75 |
Eli Lilly and Company | (LLY) | HEALTHCARE | DRUG MANUFACTURERS-GENERAL | 90 | 91.25 |
Centene Corporation | (CNC) | HEALTHCARE | HEALTHCARE PLANS | 85 | 88.75 |
Digital Realty Trust, Inc. | (DLR.PK) | REITS | REITS | 85 | 70 |
Domino’s Pizza, Inc. | (DPZ) | SERVICES | RESTAURANTS | 85 | 87.5 |
QIAGEN N.V. | (QGEN) | HEALTHCARE | DIAGNOSTICS & RESEARCH | 85 | 75 |
Cabot Oil & Gas Corporation | (COG) | ENERGY | OIL & GAS E&P | 80 | 62.5 |
MID CAP | 3/19/2020 | 4 Week MA | |||
Company Name | Symbol | Sector | INDUSTRY | SCORE | SCORE |
BEST | |||||
Teladoc Health, Inc. | (TDOC) | HEALTHCARE | HEALTH INFORMATION SERVICES | 85 | 88.75 |
Clarivate Analytics | (CCC) | TECHNOLOGY | INFORMATION TECHNOLOGY SERVICES | 80 | 81.25 |
Safehold Inc. | (SAFE) | REITS | REIT-DIVERSIFIED | 80 | 80 |
Virtu Financial, Inc. | (VIRT) | FINANCIALS | CAPITAL MARKETS | 80 | 78.75 |
The Cheesecake Factory Incorporated | (CAKE) | SERVICES | RESTAURANTS | 75 | 77.5 |
DICK’S Sporting Goods, Inc. | (DKS) | SERVICES | SPECIALTY RETAIL | 75 | 76.25 |
Deluxe Corporation | (DLX) | SERVICES | ADVERTISING AGENCIES | 75 | 75 |
Emergent BioSolutions Inc. | (EBS) | HEALTHCARE | BIOTECHNOLOGY | 75 | 65 |
Legg Mason, Inc. | (LM) | FINANCIALS | ASSET MANAGEMENT | 75 | 76.25 |
SM CAP | 3/19/2020 | 4 Week MA | |||
Company Name | Symbol | Sector | INDUSTRY | SCORE | SCORE |
BEST | |||||
2U, Inc. | (TWOU) | SERVICES | EDUCATION & TRAINING SERVICES | 95 | 87.5 |
ChemoCentryx, Inc. | (CCXI) | HEALTHCARE | BIOTECHNOLOGY | 90 | 90 |
Abercrombie & Fitch Co. | (ANF) | SERVICES | APPAREL RETAIL | 75 | 75 |
NanoViricides, Inc. | (NNVC) | HEALTHCARE | BIOTECHNOLOGY | 75 | 77.5 |
Sturm, Ruger & Company, Inc. | (RGR) | INDUSTRIALS | AEROSPACE & DEFENSE | 75 | 85 |
Verastem, Inc. | (VSTM) | HEALTHCARE | BIOTECHNOLOGY | 75 | 77.5 |
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Disclosure: I am/we are long TDOC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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