Even within a massive trend, there will still be some stocks with horrible performance. Here’s how to separate the good from the bad
A $5,000 investment that turns into roughly $3.5 million …
If you’re a regular Digest reader, you might recall a recent issue which highlighted the returns of data-storage company, EMC during the 90s.
In short, from its closing stock price on the last trading day of 1989 through the end of 2000, a $5,000 investment in EMC would have ended up being worth roughly $3.5 million.
EMC rode the Dot-Com trend higher and created life-changing wealth for early investors.
Here in the Digest, we often talk about the power of finding the right trend. And for good reason — whether it’s based on new, cutting-edge technology, a sudden legislative change, or perhaps the coming of age of a major social demographic, the right trend can drive massive investment returns, like those of EMC.
Today, there are a handful of trends that stand to generate this type of return over the coming decade — 5G technology, legalized marijuana, personalized medicine, Chinese biotechs, self-driving cars, and artificial intelligence, to name a few.
But there’s something that’s not mentioned very often …
Even powerful trends will be home to some powerfully-bad investments.
Just because a company’s core operations align with a growing trend does not mean it’s going to be a big winner. Actually, it doesn’t mean it’s even going to be a small winner … or survive, for that matter.
After all, for every EMC, there’s often a Boo.com, Kozmo, Flooz, WebVan, and Syquest.
In today’s Digest, let’s pull back the curtain on some scary realities of investing. In short, most stocks aren’t going to make you wealthy — even if they’re a part of a spectacular trend.
But then we’ll show you how to take an extra step after finding a great trend. This step will help you better identify which companies are poised to be tomorrow’s real money-makers.
***The frightening statistics behind investing
About a decade ago, the team at Longboard studied the total lifetime returns for individual U.S. stocks from 1983 through 2006.
In short, the study found that the worst performing 6,000 stocks — which represents 75% of the stock-universe in the study — collectively had a total return of … 0%.
The best performing 2,000 stocks — the remaining 25% — accounted for all of the gains.
Here’s Longboard on the takeaway:
The conclusion is that if an investor was somehow unlucky enough to miss the 25% most profitable stocks and instead invested in the other 75% his/her total gain from 1983 to 2006 would have been 0%. In other words, a minority of stocks are responsible for the majority of the market’s gains.
But this isn’t the end of it. If we dive into this study on a more granular level, it’s even more sobering.
The above statistic, that 75% of the stocks had a collective return of 0%, masks a darker truth. While it would be unfortunate to sink your money into a stock that generated nothing, you might be fooled into thinking that you’d at least walk away with your original investment capital. Not so fast …
The Longboard study found that 18.5% of stocks lost at least 75% of their value.
In other words, nearly one in five stocks didn’t just return nothing, they were double-digit losers that destroyed investment capital.
Here’s the breakdown:
The simple takeaway?
It’s not easy finding the big winners. And if you don’t find a big winner, getting a 0% return isn’t the worst potential outcome. Instead, significant loss of your hard-earned money is a very real threat — and it happens with greater frequency than many investors realize.
***So, how do you increase the odds of finding the winning stocks?
If this were a Digest with a different theme, at this point I’d suggest turning to our analysts here at InvestorPlace for help and guidance. Collectively, they have decades of experience in deciphering corporate financial statements, which helps weed out weaker companies while honing in on those that are better positioned in strength.
But let’s do our best to empower you. After all, what if you find a company that one of our analysts hasn’t recommended? How might you get a sense of its quality, assuming you’re not as confident in your ability to do a deep dive into its financial statements?
You can start by using Louis Navellier’s free “Portfolio Grader” tool.
Louis is numbers guy. He focuses on cold, objective metrics — the ones that drive corporate profitability — which translates into rising stock prices.
Louis has codified parts of his system and put it into his free Portfolio Grader tool. It’s a fast, effective way to get an instant read on a company’s fundamental strength. Let’s look at a recent case study, revealing how helpful this tool can be.
***Separating the wheat from the chaff in the cybersecurity sector
Cybersecurity is another major trend with long legs. All you have to do is look at the numbers to see how quickly this sector is growing — and how much more growth is coming. Here are a few such statistics:
– The cybersecurity company, Malwarebytes, reported in April that ransomware attempts on businesses jumped 500% just last year alone.
– According to Cybersecurity Ventures, experts predict that a business will fall victim to a ransomware attack every 14 seconds in 2019, and every 11 seconds by 2021.
– Cybersecurity Ventures also states that ransomware damages are predicted to cost the world $11.5 billion in 2019, climbing to $20 billion in 2021.
This hypergrowth certainly supports the conclusion that cybersecurity is a big trend, right? So, the unassuming investor might conclude that any well-known cybersecurity company might make for a good investment.
But let’s turn toward a recent piece from Louis to see why that’s a dangerous belief. He starts by pointing toward F5 Networks (FFIV).
… in 2009 and 2010, F5 Networks was one of the hottest stocks around — up nearly 560%! Then it had some ups and downs on its way to an all-time high in late 2018.
Now for 2019 to date, it’s down 14%, versus a 20% gain for the rest of the S&P 500.
With a high-quality stock, that would be a great opportunity to go bargain-hunting.
Let’s pause here for a second …
So, we have a growing trend — cybersecurity … we have a former high-flying stock within that trend that has proven it can soar in value … and we have a pullback, seemingly offering investors a chance to get in at much lower prices.
What would you do? Adding to the uncertainty, some analysts on the internet are making a bullish case for F5 …
So, is the pullback, in fact, a buying opportunity in a great company?
Back to Louis:
… as you see here, FFIV is not that:
At the end of the day, F5’s sales growth is looking mediocre, as are its cash flow and Analyst Earnings Revisions. It’s not growing operating margins or earnings, either, and has a poor history of Earnings Surprises, so investors should be seriously concerned from a profitability perspective.
And FFIV stock’s Quantitative Grade is downright ugly. It earns an F there, suggesting that institutional cash is fleeing.
In Louis’ article, he then walks through another example of a major cybersecurity player — FireEye — that might be tempting for some investors … but it too falls short when run through the Portfolio Grader, receiving a “D” rating.
***So, what does a good rating look like using the Portfolio Grader?
Back to Louis:
That brings me to CyberArk Software (CYBR), whose picture is the complete opposite in that regard — making it a Buy-rated stock in Portfolio Grader.
It’s also a stock I follow for Breakthrough Stocks, where we’re up 18% with CYBR in just seven months. I was sure to brief subscribers on CyberArk’s blowout earnings report in early August … in which second-quarter earnings soared 70.4% year-over-year!
Specifically, CYBR’s second-quarter earnings came in at $23 million, or $0.59 per share, up from $13.5 million, or $0.36 per share, in the same quarter a year ago. The analyst community was expecting earnings of $0.47 per share on $97.29 million in revenue, so CyberArk posted a 3% sales surprise and a 25.5% earnings surprise, too.
Here’s the full picture on CYBR:
All in all, CyberArk has strong fundamentals, growing both sales and earnings like a champ. Its Quantitative Grade is even better: It earns an “A” on this proprietary measure of institutional buying pressure, contributing to a total grade of “A” as well.
So, unlike its peers at F5 Networks and FireEye, CYBR is a Strong Buy …
I believe that CyberArk is the best cybersecurity company out there, which is exactly why I tell my Breakthrough Stocks subscribers to get “locked and loaded” on this stock. If you’re a growth investor — and I certainly am; I’ve made my career this way — then you’ve got to look at elite small-caps like this. With growth statistics like CYBR’s (and my other Breakthrough Stocks), the sky is the limit.
As we wrap up, this is a great time to be an investor — there are a number of powerful, life-changing trends picking up steam today. And over the coming decade, collectively, they’re going to create trillions of dollars of investment wealth.
But not every company attached to those trends will do well. In fact, if we go by the numbers, most will return nothing — and a good many will destroy wealth. That’s why smart stock selection — even within a powerful trend — is critical.
Have a good evening,