Focus List: Companies To Buy In Broad Market Drop

Summary

• What to buy after LexinFintech?
• Our Focus List of higher probability companies perhaps contains the answer.
• Here is what to look to buy after the next broad market sell-off.

Markets boomeranged once again in this past week, typical of the buying craze we’ve witnessed in this liquidity-driven market. After a -3.3% drop in the prior week ending January 31, leading many to prepare for the long-awaited post-Covid pull-back, the S&P 500 reversed hard, climbing back +4.6%. The only certainty today is that this market will rope in the most investors, both longs and shorts, before giving their portfolios a haircut. A couple contributing factors to this “false” market include the indexing craze, in which investors crowd into the same stocks and fund managers and forced to chase the market higher to reduce “benchmark risk”. The other big factor is flood of central bank liquidity that seemingly assures that the tide will always rise and gives investors a false sense of confidence (“Fed put”).

Our best solution today to this unusual market is to NOT follow the strategy of the lambda investors. Whatever the narrative, we *know* that everyone cannot continually make excess returns doing the same thing. And what is the strategy of the average investor? Simply buy the S&P 500 index and/or the biggest names in the index (FAANGs), put new cash to work in these products, and never set risk limits since the Fed will bail out markets if something goes wrong. Covid was a textbook example of moral hazard.

So why are we correct in shunning the strategy of the lambda index investor? We’ll, we are not correct, for now. But we continue to believe that the rubber band can only be stretched so far. Ironically, what may be most worrying, is a strong economy that generates inflation. Central banks will have to choose between supporting financial markets OR adhering to their mandate of stable prices (a cornelian choice that the Fed does not have to make today). We may yet be correct before the day central banks are placed before this fait accompli, simply due to the fact that the valuation gap between popular S&P 500 stocks and international stocks is so wide that you could drive a VLCC though it!

Last week we recommended LexinFintech, based justly on the valuation gap argument, along with strong growth, upward revisions to loan originations, and a compelling chart. Our purchase price was $6.60. Friday we already rang the cash registered on part of the position at a sales price of $10.00. That is +51% in a few weeks. While we don’t hope to hit stocks like this every week, it is the methodology that, if applied systemically, will produce exceptional portfolio returns. 1.) Do your homework and understand the company financials. Use the WMA Fundamentals Rankings. They are rigorously compiled and work! 2.) Even if you don’t have privileged info on the company, watch which way analysts are moving their earnings revisions. This will tip you off and put the odds on your side. 3.) Read the chart, please. Prices don’t lie and reversal patterns can be spotted before the big move occurs, as we enjoyed with LexinFintech.

So what is the next name that we like? We’re looking each day, scanning the charts of our fundamentally-short-listed companies. Our weekly Watch List is dynamic, and even if a companies Financial Situation score is not likely to move in seven days, analysts are adjusted up and down their earnings forecasts regularly, which is a major element in our rankings. We intentionally allow more than 1000 companies to enter our Watch List to allow our charting software to scan many price charts in search of positive divergences, reversal patterns and fake break-downs. To be in the Watch List, a company must be on a fundamental “Buy” on either Growth, Value or Yield, while not being below a “Hold” in the other categories AND not seeing downward earnings revisions on both 1 and 3 months look-back periods, or have more analysts revising down than up.

It’s a lot of us for us to deal with 1000 stocks, as on a typical day we have a couple hundred alerts to consider. For our readers, its an over-whelming time commitment. We have created a second list of companies in our Focus List, which is a subsection of the Watch List. Focus list companies require a “Strong Buy” in one fundamental category and “Buys” in the other categories. Should investors run out and buy all these companies? Of course not! Fundamental scores do not always produce strong stock returns. It cannot be that easy. Our Focus List does provide idea generation and a limited number of charts to track, waiting for the moment when fundamentals and technicals aligned, as we did with LexinFintech.

We’ll trim our Focus List to 100 to 150 stocks each week, trying to maintain representation of companies from each of our 22 industry groups. If your portfolio needs a Software or Capital Goods company, for example, we’ll have a few higher probability names for you.

Check each weekend on our site for our revised Focus List on this page or from the Models page on our website.

We’ll continue to regularly update with our portfolio ideas and moves in the QES Strategy.

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