The stock market’s powerful snapback rally seems to be in a holding pattern – but it could launch again once Wall Street fully digests the bad news on oil and investors look for stocks to purge. It’s anyone’s guess how much higher this rally goes, but it has already vaulted the S&P 500 Index to 31% gains from its March 23 low of 2,192.
Hopefully, this bounce continues to gain strength and durability. But it might not. The stock market could easily retest its March 23 lows at some point.
In fact, the stock market could fall another 10%, 20%, or even 30% from where it is today. No investor should ignore that risk, but I also don’t think investors should obsess over that possibility or hide in fear.
I believe investors should begin to buy select stocks at their current levels… just not all at once. Now is the time to design a plan to purchase a specific selection of stocks over the span of a few weeks or months.
As you may recall, we’ve talked about several stocks here since those March lows:
- Freeport-McMoRan Inc. (NYSE:FCX) on March 30.
- Lululemon Athletica (NASDAQ:LULU), Kroger (NYSE:KR) and Amazon (NASDAQ:AMZN), all on April 7.
- Nvidia (NVDA) in an April 11 email.
All five of these stocks, as I write this, are “in the black” since we last talked about them. That includes some meaningful gains of around 10% on Lululemon and Nvidia, nearly 20% on Amazon, and 22% on Freeport.
That said, it is also now a good time to “feed the rally” by trimming the most vulnerable positions from your portfolio. It makes sense to use this stock market strength to raise some cash so that you have it available to reinvest during a period of market weakness.
So today, in order to help you raise that cash, I’m showing you a way to stack the odds in your favor when analyzing your investments…
And revealing seven stocks all investors should purge from their portfolios.
5 Things We Know About Successful Stocks
Obviously, none of us has a copy of next year’s newspaper. We can never know exactly what the future will hold.
Therefore, determining which stocks will soar and which ones will plummet is an inexact science. In fact, it’s a guess.
But we can educate this guess.
Based on decades of stock market history, we know a few key details about what produces investment success over time. For example, we know that:
- Fast-growing companies tend to produce better investment results than slow-growing ones.
- Lowly valued companies tend to produce better investment results than richly valued ones.
- Cash-rich companies tend to produce better investment results than heavily indebted ones.
- Companies that generate positive cash flow tend to produce better investment results than companies that generate negative cash flow.
- Companies that possess a formidable “moat,” as Warren Buffett calls it, tend to produce better investment results than companies without any special competitive advantage.
So when we examine the stocks in our portfolios, we should favor those that possess one or more of these winning traits.
Obviously, some stocks that possess serious flaws will buck the odds and perform well anyway. Sometimes heavily indebted, slow-growing companies find a way to reverse their declining fortunes and become major successes. But companies like that are rare outliers.
You don’t want to pursue investment success by betting on flukes. Instead, you want to stack the odds in your favor as much as possible.
And I’ve discovered a way to do that…
The “Portfolio Purge” Formula
It’s a simple tactic for raising the odds of investment success – for determining which stocks are likely to flourish – and which are likely to disappoint.
You may be shocked at how simple this two-part filter is. But despite its simplicity, it is extremely valuable and powerful.
I routinely use this simple test to identify potential investments. Obviously, my research does not end there. Once I identify a potential investment, I qualify that stock by conducting additional targeted qualitative and quantitative research.
Some investment candidates make the cut. Most don’t.
I also use this test to identify stocks to avoid… and dump.
Knowing which stocks to avoid can work wonders for your portfolio.
But what many investors fail to realize is that well-known, popular stocks are often the most dangerous. I’m talking about once-popular stocks like Enron, Countrywide Financial, Fannie Mae, Kodak, Blockbuster, and even General Motors.
But the “Portfolio Purge” Formula cuts through all the noise. It doesn’t care if a stock is popular or unpopular.
I recently applied this test to the S&P 500 (excluding financial sector companies) to find a “Bottom 25.” Based on historic tendencies, these stocks, as a group, will struggle to keep pace with the overall stock market during the next five years.
Stocks to Purge
I’ll share the top seven of this “Bottom 25” right now:
- Williams Cos. (NYSE:WMB)
- Kinder Morgan (NYSE:KMI)
- Public Service Enterprise Group (NYSE:PEG)
- Apache Corp. (NYSE:APA)
- Sempra Energy (NYSE:SRE)
- Edison International (NYSE:EIX)
- Davita (NYSE:DVA)
These are the “best of the worst,” but still: If these stocks were graduating high school seniors, they would be voted “Least Likely to Succeed.”
Certainly, this list might produce a couple of outliers – stocks that will manage to reverse their negative trends and deliver shareholder-pleasing results.
But most members of this group are likely to disappoint.
If you own any of them, be sure you’ve done your research and that you have good reason to keep them.
If not… purge them from your portfolio.
To learn how to get the 18 other stocks on my “Bottom 25” list – and the details of my “Portfolio Purge” Formula – don’t miss this special presentation I put together.
To view it, click here.
P.S. Most folks reading this remember the 2008 financial crisis. The bankruptcy of Lehman Brothers… the housing market implosion… the stock market crash. We were on the verge of a global economic meltdown. What many folks don’t remember is that the period right after the 2008 crisis was a fantastic time to buy great businesses.
Sound familiar? That’s exactly where we are right now. So if you’re looking to put a little bit of money to work right now before the Great American Restart… for the chance at extraordinary gains like 3,041%, 6,170%, and more… you’ll find a few great ideas right here.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends … before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south. Eric does not own the aforementioned securities.