If I could close the stock market every August, I would. With New York and Europe on vacation, and trading volumes so light, it seems like any headline puts stocks into a tizzy – no matter how consequential it actually is, long term.
But if you know me at all, you know I believe in keeping calm and focusing on the fundamentals.
I certainly was glad I did with AppFolio, Inc. (NASDAQ:APPF). Like most other stocks, the end of 2018 was rough on APPF, despite third-quarter earnings season. AppFolio’s Q3 report included strong forward-looking guidance.
Nonetheless, the market volatility erased most of the gains the stock had made for the year. That was disappointing to see, as the actual third-quarter numbers were also good. Revenue grew 32% and net income grew 50% year-over-year, demonstrating high demand for AppFolio’s product: cloud-based software for small business owners.
Not to be discouraged, I went on record that APPF was a “Buy” – and now, the stock’s up a nice 125% for my Platinum Growth subscribers!
In the most-recent report in late July, the company smashed its second-quarter earnings forecasts. Wall Street analysts had expected $0.11 earnings per share – well, AppFolio delivered $0.65 per share! Clearly, sticking with APPF through the volatility was the right call. And now I’m making an even bolder call for the market in general.
Then there’s Innovative Industrial Properties (NYSE:IIPR). It is the only publicly traded cannabis real estate investment trust (REIT). The stock boasts a strong 2.3% dividend yield and exceptional relative strength: It’s absolutely blowing away the S&P 500’s return for 2019 to date.
I’m not ready to recommend a pure play on marijuana just yet, as I still need to see a few quarterly reports on the books that show that they have the enough staying power to propel them higher over the long term, but IIPR is different. You see, Innovative Industrial Properties has never grown, processed or sold a single marijuana product. Rather, it leases facilities to medical cannabis providers…first in California, and now in 12 states, most recently expanding further into Pennsylvania. Basically, it’s the “landlord” of these companies.
And it’s an understatement to say that medical marijuana is a growth industry, especially for IIPR. All of the REIT’s properties are leased (100%), and analysts are expecting 123% annual earnings growth.
Only one thing has held IIPR stock back at all: Investor sentiment for legal weed in general has wavered lately. Yet stocks like IIPR remains one of my top “Buys” in my investing services today.
How can I be so confident making these calls? Well, run the stocks through my Portfolio Grader, and the reasoning behind my “Buy” recommendation becomes apparent.
For example, here’s my Report Card for IIPR:
While cash flow leaves something to be desired, and Wall Street analysts appear to be underestimating the stock, it’s hard to argue with top-notch sales growth, earnings growth, and buying pressure (reflected in the Quantitative Grade) – all three of which get an “A” rating from Portfolio Grader.
Neither APPF or IIPR (or any stocks, for that matter) have gone straight up. But by focusing on the key drivers of growth – and how likely the company is to provide that growth in the future – it’s never a question whether to invest or not.
In the long run, fundamentals are truly what matters.
And we can apply much the same logic to the broad market.
Two Most Important Factors in the Market Today
This has been a particularly wild August, as protests in Hong Kong and the escalating U.S.-China trade war collide with thin market conditions. It’s a sure recipe for sharp swings in stock prices.
But when you look past the short term, and hone in on the market’s fundamentals, here’s what you see:
In the bond market, the “inverted yield curve” reared its ugly head again, as the 10-year Treasury actually began to yield less than the two-year Treasury.
Historically, that’s been a signal of looming recession. But this time is unique for two reasons:
- One, what’s driving this is international capital flight. The bond markets elsewhere are downright ugly. The American economy offers better stability and growth than many others, making the United States an oasis.
- For another thing, the Federal Reserve has already taken steps to un-invert the yield curve. The situation is devastating to the operating margins of the banks the Fed regulates. It’s likely that we’ll see further action from the Fed to pave the way for market success. I see at least two more rate cuts, with one potentially coming in September.
Besides bonds, I’ve also got my eye on corporate investment. And August is a big month for stock buybacks, which are a net positive for the share price. Given the low Treasury yields, I expect to see even more companies take advantage of low rate to augment (or being) their stock-buyback programs in the coming weeks.
Bottom line: I’m not seeing much to be worried about, long term, in the current landscape. If anything, there are a lot of positives to look forward to.
Next time the Dow – and the headlines – turn south, just remember that this was a great earnings season for strong businesses like the ones I recommend:
Out of the 24 stocks in Growth Investor that have reported their latest earnings, 21 turned in a positive earnings surprise!
So, I’m confident making the very bold prediction I’m putting out there now. All I’m doing is following the same blueprint I’ve used over my entire 30+ year career. It continues to steer us into the best stocks the market has to offer.
How You Can Navigate the Market and Sleep Easy
I’ve been at this a long time, ever since I first built the stock-picking system that powers my Portfolio Grader, many years ago.
But at the end of the day, all of us have much the same goals for our investment portfolios:
- Thrive in Market Sell-Offs…
- Create Your Own Million-Dollar Retirement Plan…
- Get Paid Up to 4 Times a Month…
You get a taste of my approach through my letters here at Market 360 – but by upgrading your membership, you can have my whole catalogue of investing guides at your fingertips, whenever you need them. Go here for more details and to hear the bold prediction I’ve just made.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.