As the S&P begins to move lower, where can investors look for strength as we wait for the economic reopening to help growth?

 

The great experiment begins …

Can we re-open the economy without a surge of COVID-19 cases that forces us back into another debilitating lockdown?

As a follow-up, if such a surge occurs, are we willing to accept the associated loss of life in order to avoid some measure of economic death? How would we even define acceptable levels of each?

As investors, we have additional questions …

To what extent do current stock prices accurately reflect corporate-earnings realities?

Will Wall Street continue to be willing to overlook today’s horrendous economic data, and remain focused on tomorrow’s “back to normal”?

How resilient will Wall Street be if any unforeseen complications trip-up this “back to normal” process?

***Let’s start with what we know

 

For that, let’s turn to famed investor and editor of Accelerated Profits, Louis Navellier. Named the “King of Quants” by Forbes, Louis is one of the early pioneers in using predictive algorithms to scour the markets for quantitatively-strong stocks poised to climb.

From his Monday update to subscribers:

Now, earnings season is starting to wind down. According to FactSet, approximately 86% of S&P 500 companies have announced results already …

S&P 500 companies are averaging a 13.6% drop in first-quarter earnings and 0.6% revenue growth.

Looking forward, second-quarter earnings results will not be nearly as good. A lot of businesses have been hit hard by the coronavirus pandemic, and that will be very apparent in second-quarter earnings results.

According to FactSet, second-quarter earnings are now expected to decline 40.6% year-over-year …

The bottom line: We need to play it safe and focus on strong fundamentals.

***So, a logical follow-up question would be “well, what kind of companies have strong fundamentals today?”

 

As we answer this, let me digress a moment …

Here at InvestorPlace, we’re proud to bring you the insights of some of the most intelligent analysts in the investment community. Together, they represent decades of market experience and wisdom, and have dug up countless investments that have posted triple and quadruple-digit returns.

Now, these successes weren’t all born from one type of investing. Our analysts find their winners in different ways.

For example, Matt McCall is our thematic expert. He starts by focusing on the market’s biggest next-generation “themes” or trends that will shape society for years to come.

Meanwhile, Eric Fry is global macro expert. He starts with a big-picture analysis, finding the various asset classes and sectors poised to surge, before digging down to specific investments.

As regular Digest readers know, Louis is a numbers guy. He focuses purely on cold, impartial data that sniffs out specific stocks anchored in strength.

The interesting thing is that despite these different approaches, these three analysts often find themselves looking in the same corners of the market.

Why?

Because what Matt, Eric, and Louis are essentially looking for — albeit in different ways — is strength.

So, circling back to the question above — where are “strong fundamentals” today?

Well, they’re found in companies that are able to continue performing well — even thrive — in today’s market climate.

That means revenues that are continuing to climb even under lockdown … cost-structures that haven’t ballooned from Coronavirus safety-precautions … and longer-term growth prospects that remain strong despite the Coronavirus — possibly even stronger because of the Coronavirus.

And which sector generally boasts these characteristics?

Tech.

Despite traveling different paths to arrive there, Matt, Eric, and Louis all have “tech” in their crosshairs today.

As to Louis’ path, it’s simple — he just follows the breadcrumb-trail of numbers.

***How Louis’ numbers-based approach finds strength regardless of sector

 

Though Louis might follow trends and broad markets for his own edification, it’s not what drives his investment decisions. For that, he looks exclusively at numbers.

Think quarterly earnings, net profits, gross profits, sales, P/E, return on equity, tangible assets, stock price momentum, analyst revisions, trading volume, and relative strength just to name a few.

He then runs this data through powerful computer algorithms, sifting and sorting to identify a select few stocks characterized by fundamental strength.

And though “tech” isn’t his specific, intended destination, a great many of the fundamentally-strong stocks he’s finding today are in that sector.

To illustrate, let’s start with the S&P Equal-Weight Index.

To make sure we’re all on the same page, the S&P Index is comprised of a shade more than 500 of the largest companies in the United States. However, all of these companies don’t get equal representation in the index. That’s because the S&P is “weight-averaged.” In other words, the bigger the company, the more “representation” it has in the index.

Given this, when we look at the S&P, we’re not receiving an accurate depiction of how all stocks are doing. But by looking at the S&P Equal-Weight Index, we get a far-clearer idea of how the average stock in the S&P is performing.

Below, we compare the S&P Equal-Weight Index with XLK, which is the Technology Select Sector ETF, a good proxy for “tech.”

Year to date, XLK has recouped all its losses, while the S&P Equal-Weight Index remains down 22%.

 

 

We can continue to see tech’s strength by looking at recent earnings data from the market research company, Factset.

As of last Friday, with 86% of the companies in the S&P 500 reporting actual results, the tech sector has beaten all other sectors in terms of the largest positive (aggregate) differences between actual revenue and estimated revenue.

And in terms of the sectors boasting the highest percentage of companies reporting revenues above estimates, it’s second (behind health care) at 73%.

Bottom line — there’s strength in tech …and strength supports stock gains.

***Despite this strength, caution is needed

 

Back to Louis:

The reality is that while the overall tone of the market is excellent right now, it’s going to grow a lot bumpier in late May.

Earnings season will wrap up in the next week or so, and then investors’ attention will shift to the world reopening and economic data …

As we’ve discussed, I’m still expecting a U-shaped recovery. We just need to get through the second quarter, and then we should see a massive improvement in third-quarter economic data, as well as companies’ earnings and sales …

The stock market will grow bumpier as it narrows and focus on the creme de la creme in the upcoming weeks.

Now, this brings up a question …

***If the market is going to get bumpier as we approach Q2 earnings, when might a fundamentally strong stock lose its luster and need to be removed from a portfolio?

 

Well, for Louis, again it ties back to numbers.

Take CyberArk Software (CYBR).

Regular Digest readers will recognize CYBR, as we’ve pointed toward it several times as a top security company leading the charge against cyberattacks. If any trend has long-legs, it’s cybersecurity.

So, why would Louis recommend selling this stock?

Here he is to explain:

At that time (Louis added CYBR to the portfolio), the company was benefiting from positive analyst revisions, double-digit revenue growth and triple-digit earnings growth. In fact, CYBR had just reported 100% annual earnings growth and 31% annual revenue growth for its third quarter in fiscal year 2018.

Fast forward 18 months, and CyberArk Software’s earnings have slammed on the brakes. For the first quarter, which will be reported on Wednesday, May 13, the analyst community is looking for earnings per share to decline 35.7% year-over-year to $0.36 per share. Analysts have also lowered earnings forecasts by 34.5% in the past three months.

Let’s take that as our cue to exit. If you purchased CYBR at the time of my original recommendation, you’ll sell the stock for about a 45% gain.

That alert came last Friday.

So, what has CYBR’s stock done this week?

 

Down 13% and falling as I write late-morning on Thursday.

Whether it’s by adding high-fliers to your portfolio, or by weeding out the former-high-fliers who have lost their luster, an impartial quantitative system can make a powerful difference in your returns.

***Mark your calendar for next Wednesday, May 20, at 4 PM ET to learn more about a numbers-approach to the markets

 

Louis is going to be holding a special event called the Accelerated Income Project.

Now, there’s the twist …

Above, we discussed the numbers-based methodology in which Louis finds stocks poised to climb (as well as sell those stocks losing their earnings strength).

But in today’s dicey market, which is likely to get choppier in the weeks ahead, Louis is looking for another important factor — something signifying an imminent move higher in a stock.

After all, a stock can be rooted in fundamental strength yet still trade sideways for long stretches as it waits for the market to wise up to its strength.

Given this, Louis and his team have been tweaking their input variables and algorithms, focusing on a way to adjust their approach for outsized, short-term gains.

In other words, they’ve been looking for ways to identify compressed periods of hypergrowth, based on strong fundamentals coupled with the catalyst of heavy buying pressure.

Louis will be discussing his system and far more next Wednesday. It’s a free event, just click here to reserve your seat.

As we wrap up, the name of the game today is fundamental strength. If this isn’t a part of your market strategy, join us Wednesday to learn how Louis’ numbers-based, computer-driven system might improve your returns … and best of all, do so in these compressed periods of hypergrowth.

Have a good evening,

Jeff Remsburg