Bullish, Bearish, Perplexed, Doesn’t Matter — Stay In Shape

We’re now going through the hard part of the stock-market crash. The relentless downward momentum has eased and we’ve even seen some rallies not to mention indications that the coronavirus curve, is, in fact, leveling (see, e.g., the New York City epicenter). But bear market rallies are real things so it’s hard to say the market is out of the woods. Even if we are past the peak in terms of infection, we don’t yet know how lasting the economic damage will be. Some areas will probably snap back and go on to bigger and better. Others may be done once and for all. What’s an equity investor to do? I can’t give you a confident answer regarding the market’s next 3- to 6-months. But I can confidently suggest that whether you’re bullish, bearish or on the fence, you absolutely positively need to stay “in shape” and ready to get back in the game: If need be, own and manage a fully-invested “paper” portfolio.

© Matt Zubak, IG: @zubakathleticperformance

Keep At It

Sometimes, it’s easier to recognize things we should do if we see similar ideas applied in another discipline, one we can view more dispassionately than our own. In this regard, I’ll quote Greater Philadelphia Athletic Performance Coach Matt Zubak, who minced no words telling local high school football players who dreamt of moving on, to refrain from using the Coronavirus quarantines as an excuse to just chill: 

“If you show up in the fall and you’re out of shape, you’re slow, you’re weak or injured because you’ve been sitting on the couch all this time feeling sorry for yourself blaming the virus for why you’re not in good shape, no one’s going to care. Your high school coach doesn’t care. They just think you’re not prepared. College recruiters and scouts aren’t going to care because there’s other people that are in phenomenal shape and have done phenomenal preparation. . . .  This situation . . . cannot be an excuse to not do any work.”

Analogous to the scenario Zubak suggests to his audience, at some point, tomorrow, next week, next month, whatever, the stock market is going to become buyable. Maybe it will be a v-shaped snapback. Maybe it will be a new-normal growth rate from a newly established long-term base. Either way, if you’re not prepared to be 100% invested in your normal risk-based equity allocation, Mr. Market is not going to care and will be perfectly content to see countless others move forward while you get left behind. The coronavirus crash “cannot be an excuse to not do any work” staying abreast of the market and identifying the companies you want to own when you decide the time is right. (Chaikin Analytics subscribers can monitor the state of the market with the help of our daily Morning Insights from Dan Russo CMT, Chief Market Strategist, the weekly Market Insights from Founder and Chairman Marc Chaikin).

© Can Stock Photo / gstockstudio

Action Plan

Here’s what to do, whether for real-money investing or paper trading while you wait for better market conditions:

  1. Articulate a vision of the kinds of stocks you want to own, whether in a paper portfolio because you think its premature to jump back in or in a real-money portfolio you buy at once or gradually in little portions; 
  2. Build and use one or more screens to identify specific stock ideas;
  3. Evaluate individual candidates as per your usual approach.

Item 1: What you might want to own

The kinds of stocks you should want to own is a personal choice. But in recent days, company Dan, Marc, and I have each come up with screens that have some core elements in common:

  • Financial strength is an absolute must; no company, however appealing its story may seem, is worth owning if its balance sheet is weak enough to threaten its ability to survive the crisis or maximize its potential down the road. 
  • Value is nice — all three of us respect it — but right now, it has to less critical than in the past because we don’t know what the E is in P/E, the S is in P/S, etc. And by all means, this is not the time to scour the market’s dumpsters in pursuit of deep- or cigar-butt value. It’s OK to own badly beaten-down stocks, but not based on solely numeric analysis; you also need to be able to make a sensible qualitative case for why you’re in (I, for example, like residential, storage, data center and medical office REITs but despise, with every fibre of my being, retail mall and office properties). 
  • We want growth, future growth (which may or may not match historical growth). Because the future may differ from the past (we say this, not as a matter of legalistic boilerplate but because there is likely to be a lot of real truth here), we rely a bit on historical growth numbers but a lot on sentiment and market-based signals that cue us in to the investment community’s assessment of future growth. Our Power Gauge ranking system has a heavy emphasis on this. And this, our model’s consideration of sentiment and market (technical) indicators raises another very important point . . .
  • Be humble. Don’t try to out-think the room. Contrarianism is fun. It’s romantic. And the market is not perfect so there is a legitimate place for it. But not today. We’re still in crisis mode. Take advantage of the considerable brainpower out there and let the market, and the data, give you more-credible-then-usual second opinions. Unless you have really particular affinities for particular types of companies, wait till next year to catch the market’s falling knives. We use our “power bar”ratios (bullishly ranked stocks relative to those with bearish ranks) to tell us which sectors are appealing. Our favorites are Communications Services, Healthcare and Information Technology. If the screens you built, using whichever tool you like, point you there, then you’re probably applying the other principles suggested here. If not, consider adding filters that limit your screening to these sectors. 

Item 3 (I know it’s out of sequence, please bear with me): Evaluating Individual Stocks

Just keep doing what you always do when you examine an individual company. At Chaikin, our recommended approach is discussed here.

Item 2: Screening

There is no single correct way to screen based on the above-discussed ideas regarding desirable stocks (in fact, there’s never a single correct way to screen for anything). 

There are many good stocks to match any goal and its ok if you find A, D, E, F and Q while I find C, D, F, R, and W. Back when I used to do screening presentations to investment groups, one of my slides said “Thou shalt not covet thy neighbor’s stocks.” If your stocks are working, be happy and keep doing what you do. If your neighbor is also doing well with different stocks, both of you be happy and congratulate each other. Just don’t get hung up on replicating anybody’s specific set of rules. Use the screens suggested here (al built using the Chaikin Analytics screener) a template you can copy completely or subject to your own fine tuning, or use as a springboard for coming up with your own variations.

Marc Chaikin’s screening rules:

  • Universe is S&P 500
  • Long-Term Debt to Equity Power Gauge factor ranked Bullish or better
  • Earnings Growth Power Gauge factor ranked Bullish or better
  • Industry Group Strength Power Gauge factor ranked Bullish or better

Dan Russo’s screening rules:

  • Universe is Russell 3000
  • Overall Power Gauge rank is Neutral +, Bullish, or Very Bullish
  • Long-Term Debt to Equity Power Gauge factor ranked Bullish or better
  • Free Cash Flow Power Gauge factor ranked Bullish or better
  • Chaikin Money Flow indicator is Strong
  • Chaikin Relative Strength indicator is Strong
  • Minimum Stock Price is $10

My screening rules:

  • Universe is Russell 3000
  • Overall Power Gauge rank is Neutral +, Bullish, or Very Bullish
  • Long-Term Debt to Equity Power Gauge factor ranked Very Bullish
  • Return on Equity Power Gauge factor ranked Bullish
  • Earnings Consistency Power Gauge factor ranked Bullish
  • Return vs. SPY in latest month is up 2% or more (Note: It’s OK if stock is down, as most are. I’m lookin for stock return compared to SPY return).
  • Chaikin Money Flow indicator is Strong
  • Chaikin Relative Strength indicator is Strong

Stock Ideas

Stocks that passed the screens created by Marc and Dan can be seen by Chaikin Analytics subscribers here and here respectively.

The stocks that passed my screen are:

  • Arena Pharmaceuticals (ARNA) – Biotechnology
  • Bio-Rad Laboratories (BIO) – Life Sciences Tools and Services
  • Diodes Inc. (DIOD) – Semiconductors
  • eGain Corp. (EGAN) – Software
  • Fabrinet (FN) – Electronic Equipment
  • Interactive Brokers (IBKR) 
  • Incyte Corp. (INCY) – Biotechnology
  • Masimo Corp. (MASI) – Health Care Equipment
  • Synopsys (SNPS) – Software  

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