Louis Navellier’s numbers-based market approach has found another winner. How to take advantage
Just over two weeks ago, in our January 23rd Digest, we put a stock on your radar, making a case for adding it to your portfolio.
Since then, as of this past Friday, it had popped 15% …
A large chunk of this gain came on Friday, as the stock soared 9% in the wake of a blowout earnings report … despite the Dow shedding 277 points.
Earnings per share came in at $1.88, towering over the Zacks Consensus Estimate of $1.57 per share. This represents a positive earnings surprise of 19.75%.
Better still, based on the broader macro environment, it looks like more gains are likely coming in 2020.
So, what’s this stock?
It’s Louis Navellier’s pick for InvestorPlace’s Best Stocks for 2020 contest …
PennyMac Financial (PFSI).
In today’s Digest, let’s revisit PennyMac, the case for more gains to come, and then look at Louis’ system for finding similar such winners — we’ll even give you a free stock-finding tool that’s based on how Louis digs up these winners himself.
***The stock “perfectly positioned to take advantage of one of the biggest trends in the U.S. economy: housing“
The above quote comes from Louis, as he described PennyMac in his write-up for our Best Stocks for 2020 contest.
For readers who are less familiar with PFSI, it’s the fourth largest originator and sixth largest loan servicer in the U.S.
Here’s Louis with more details. The quote below comes from his November update to his Breakthrough Stocks subscribers, which is where he originally made the PSFI call (subscribers who acted are now up 26%):
Overall, it’s a fantastic environment for mortgage lenders like PennyMac Financial Services — and I suspect that it will add nicely to the company’s top and bottom lines in the upcoming quarters.
And the analyst community agrees. For the fourth quarter, analysts have upped earnings forecasts by a whopping 53.5% in the past three months. The current consensus estimate calls for 141.3% annual earnings growth and 73.1% annual sales growth.
As you now know, despite these upwardly revised numbers, PennyMac still blew away earnings expectations on Friday.
***Why more gains are likely in store for PFSI
Let’s go back to Louis for the tailwinds in 2020 that will continue pushing PennyMac:
… the Federal Reserve has spent the whole year reverting to a very accommodative monetary policy. Low interest rates are here to stay and banks are lending.
This all bodes well for both the housing industry and home buyers. Even renters that are looking to upgrade will benefit from lower construction costs, since more availability means more price competition …
In PennyMac’s earnings call with analysts last week, PFSI CEO David Spector echoed this same outlook. He also pointed toward additional sources of strength for PFSI as 2020 rolls on:
Looking ahead, the U.S. economy remains strong with low interest rates. The Federal Reserve has indicated that it expects to maintain the current target for the federal funds rate, as it continues to monitor the balance between its maximum employment and 2% inflation target objectives …
More recently, mortgage rates have declined again providing support for continued elevated refinance volumes. In recent months, major economists have generally increased their 2020 origination forecast, and we believe these low rates will continue to drive those forecasts higher.
Home prices have continued to appreciate, but at a pace more in line with wage growth. Most economists forecast continued home price appreciation through 2021, albeit at a slower pace. Low unemployment and a strong U.S. economy continue to support historically low levels of delinquencies.
***Picking up on one of Spector’s points, if you missed it last Thursday, Bloomberg reported that U.S. mortgage rates slid to their lowest levels since July 2016
According to data from Freddie Mac, the average rate for a 30-year fixed mortgage was 3.45%. That’s down from 3.51%. The 15-year average fell to 2.97% from 3%.
These falling rates continue to fuel what’s already strong demand for housing. As we noted in our January 23rd Digest, as of the end of December, there was only a 3-month supply of homes on the market. That’s the lowest in National Association of Realtors (NAR) records in two decades.
From Sam Khater, Freddie Mac’s chief economist:
The combination of very low mortgage rates, a strong economy and more positive financial market sentiment all point to home purchase demand continuing to rise over the next few months.
And who will benefit from increased home purchase demand?
You guessed it — PennyMac.
***Pivoting from PennyMac to how Louis found PennyMac, what can we take away to use in our own investment process?
Louis’ success in the stock market boils down to one thing …
Numbers.
It was early in his career that he learned that hunches and gut-feelings wouldn’t get him very far as an investor. That’s because, all too often, our emotions lead us to act in ways that are the exact opposite of what we should be doing.
Cold, impartial numbers help prevent those mistakes.
From Louis:
I’m a numbers guy. Always have been. Since I was a kid, I’ve loved math and I knew that math was the right way to understand the world.
Said another way, I depend on evidence for my decisions.
I depend on an objective set of criteria that signals what I should buy, when I should buy it, and when I should sell and collect the profits.
So, what’s this objective set of criteria? And can we use it in our own stock selection process?
It turns out there are eight key metrics Louis considers when analyzing a stock. If you want to mimic his approach, here’s where to begin:
Strong sales growth, operating margin growth, earnings growth, earnings momentum, earnings surprises, analyst earnings revisions, cash flow, and return on equity.
I’ll do you one better …
If you’d like help applying these eight criteria, you can use Louis’ free “Portfolio Grader” tool. This will enable you to sidestep logical follow-up questions like, “well, how much earnings growth is enough?” or “what sort of return on equity signals a buy?”
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.
Returning to PSFI, here’s how it looks through the Portfolio Grader:
You could think of Louis’ Grader as a two-second screener. Use it to save yourself tons of time in analyzing a potential addition to your portfolio.
If you want additional evidence that Louis’ numbers-based system works, here are the percentage returns from all the holdings in Louis’ Breakthrough Stocks portfolio as of end of day this past Friday. I haven’t done any position editing, so you’ll see the few losing stocks as well. I’ve only edited out the names and other such details.
This track record illustrates the power of a numbers-based market approach.
If your approach isn’t getting you the type of results you want, click here to learn more about Louis’ method in his Breakthrough Stocks newsletter.
Wrapping up, PennyMac has been soaring, but if the broader macro picture remains as strong as it appears today, expect more to gains to come in 2020.
Have a good evening,
Jeff Remsburg
