A cautionary tale of missing out … basing stock selection on the wrong thing … why numbers need to be at the heart of your market strategy

 

In May, I outsmarted myself out of 95% gains.

To be fair, I suspect I’m not the only one who has made the error I’m about to describe.

In fact, given the S&P’s volcanic gains since late-March, I’m going to guess that many investors can relate.

But there’s a lesson here … one that we’d be wise to remember, especially in today’s high-valuation market.

In short, numbers — not emotions — should be driving our investment decisions regardless of the market conditions.

***”It’s already too high”

 

In May, I allowed a stock chart to rob me of an opportunity to nearly double my money.

Specifically, I based my “buy or don’t-buy” decision for Zoom Video Communications on its stratospheric chart so far in 2020, rather than its actual financial prospects.

You’re likely well aware of Zoom at this point. It has been the go-to online communication platform for remote workers as lockdowns have kept employees out of the office.

As its userbase has soared under lockdowns, so too has the stock.

I recall reading headlines about Zoom’s explosive growth as early as March. The case for investing was compelling, but a voice in my head questioned how long lockdowns would last. And if the world returned to normal, would Zoom tank? Was it just a shooting-star stock?

Overall, I convinced myself I would be chasing big gains, putting my money into place shortly before investors realized the stock had come too far, too fast, and bailed …

So, I did nothing.

***In early May, something happened that I wasn’t expecting

 

Our own Louis Navellier officially recommended Zoom to his Accelerated Profits subscribers.

From that recommendation:

If you’ve had a Brady Bunch-esque video chat with family, friends and/or co-workers in the past few months, you’re likely familiar with our next addition to the Ultimate Growth Trades Buy List.

In 2011, Zoom Video Communications, Inc. (ZM) was founded to create a platform that simplifies communications between individuals, employees and businesses.

Today, Zoom is a leading provider of online video and audio conference calls, as well as collaboration, chat and webinar tools. The company’s software-based conference room is utilized by businesses and individuals around the world — and it’s become widely popular in the current environment with a lot of businesses operating remotely.

Given the coronavirus pandemic and subsequent stay-at-home orders, millions of people around the world have been using Zoom’s online platform daily. Video chats and virtual meeting spaces have been vital to maintain businesses day-to-day operations and communications with employees.

As a result, Zoom’s daily meeting participants has surged to 300 million, up from the 10 million daily meeting participants in December.

Many analysts are now expecting to see phenomenal top- and bottom-line growth in 2020.

Now, I’m well-aware of Louis’ winning track record. It’s usually a losing proposition to bet against his recommendations.

But in that moment, I was fixated something else — Zoom’s chart.

Here’s how it looked on the day Louis recommended it — up 128% since the turn of the year …

 

As you can see, there was also a substantial degree of volatility. It made the gains feel wobbly … brittle.

***What Zoom’s chart didn’t show me

 

Based on nothing more than Zoom’s 128% gains between January and Louis’ recommendation, I eventually arrived at the following conclusion:

Zoom has climbed too high. Even with Louis’ recommendation, you’re late to the party. Avoid.

What I failed to factor into my analysis was Zoom as an actual company, whose profit-situation might actually warrant those 128% gains … and more.

In short, I didn’t account for the numbers.

Louis did.

Back to his Zoom recommendation:

Interestingly, even before the global pandemic, Zoom’s business was booming. In the company’s fourth-quarter in fiscal year 2020, revenue soared 78% year-over-year to $188.3 million.

Earnings skyrocketed 1,175% year-over-year to $15.3 million, or $0.05 per share, compared to $1.2 million, or $0.01 per share, in the fourth quarter of 2019. Adjusted earnings per share came in at $0.15, up from $0.04 in the same quarter a year ago, topping analysts’ forecasts for $0.07 per share by a whopping 114.3%.

As a result, analysts have increased first-quarter earnings forecasts by 50% in the past three months.

Zoom will release results for its first quarter in fiscal year 2021 on June 2. The analyst community is looking for adjusted earnings of $0.09 per share and revenue of $202.04 million. That represents 80.9% annual revenue growth and 200% annual earnings growth. ZM is a good buy below $185.

So, how did it turn out?

Below is Zoom’s chart since Louis’ May 8 recommendation.

As you’ll see, investors who focused on financial strength, not charts, have been rewarded with 95% returns.

***What does your investment selection process focus on?

 

In Friday’s Digest, we highlighted a challenge facing investors today — namely, the valuation of the broad stock market. It’s among historic highs.

These values are lofty enough to make an investor think twice about putting money to work.

However, at the same time, the dollar is losing value. Plus, a new policy from the Fed that’s “inflation-friendly” means cash-savings will likely be a great way to lose wealth in the coming years.

It almost feels like you have a terrible choice between getting burned by an expensive stock market or getting burned by a depreciating dollar.

Well, as an alternative, what if you put money — not into the “stock market” with its lofty valuations — but rather, into specific stocks with powerhouse earnings numbers that support future gains?

That’s the heart of Louis’ strategy.

And it’s what enabled him to see promise in Zoom when all I saw were red flags.

Do you know when 128% gains don’t signify overvaluation? When the numbers suggest the stock’s strength warrants even more gains.

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.

Over the decades, Louis has developed a high-tech trading system guided by preset algorithms — basically, step-by-step computer instructions.

It’s a program designed to digest vast quantities of market data, from which it identifies attractive investments … like Zoom. To learn more about his market approach, click here.

***By the time you read this, Zoom may have announced its latest earnings report

 

Zoom is set to report earnings after the market closes this afternoon. What is Louis expecting?

From his update last week:

I’m expecting a blowout second-quarter earnings report next Monday, August 31.

For the second quarter, earnings per share are expected to surge 462.5% year-over-year to $0.45, up from $0.08 per share in the same quarter a year ago. Analysts have also upped earnings forecasts by a whopping 309% in the past three months. Typically, positive analyst revisions precede future earnings surprises.

I should add that Zoom has posted an average 284% earnings surprise in the past four quarters. So, another stunning earnings surprise is likely on Monday afternoon.

Now, perhaps Zoom will report blowout earnings … perhaps it will disappoint.

There are no sure-things in the market — that’s the reality of investing.

But if you’re looking to maximize the odds that you’re picking winners, you’re better off using a numbers-based system than hunches.

As we wrap up, what’s at the heart of your stock selection strategy?

Is it how far the stock has come already? Who gets voted into office in November? Or perhaps, whether “the market” will roll over and give back a huge chunk of its recent gains?

Or is it cold, impartial numbers that reveal the specific strengths of the stock your considering?

If it’s not the latter, you might be in danger of missing out on 95% gains like me.

Have a good evening,

Jeff Remsburg