“Hype stocks” or bubble stocks sure grab headlines and get people talking about the markets. But they also carry significant risk that can be avoided by focusing on the fundamentals like earnings, revenue, cash flow and support from institutional investors.
It’s why all of my recommendations at Power Options will come from fundamentally superior growth stocks that are well-positioned to meander higher over the next year or two.
The truth of the matter is when a hype stock falls out of favor or the bubble stock is pricked, the smart money flees, and the investor is left holding the bag.
Case in point: GameStop Corp. (NYSE:GME).
GME was a low-quality stock that surged during the “Reddit Revolution.” Essentially, a group of Reddit users joined forces during the last trading week of January 2020 to put the screws to a bunch of big hedge funds that were shorting stocks like GameStop Corp. Their efforts ultimately created dramatic short-covering rallies that shot GameStop Corp. shares into orbit.
For GME to stay in orbit, it needs fundamentals — and that’s an area where it was sorely lacking. The company’s full-year sales and earnings were on the decline.
So, while the Reddit Revolution is squeezing shorts and sending stocks like GME into orbit, these stocks will fall back to earth due to poor fundamentals. And, unfortunately, many will “burn up” on reentry.
As you can see below, GME gets an overall “B” rating in my Portfolio Grader. The high grade is mostly due to the stock’s momentum on Wall Street, which earns it an “A” for its Quantitative Grade. On closer inspection, though, the company earns a “D” for Fundamentals, and an “F” for Sales Growth, Earnings Momentum and Return on Equity.
The stock fell nearly 90% two weeks after hitting its high of $483 in late January. To put that in perspective, Keith Gill, the Reddit trader who first flagged the short squeeze opportunity in GameStop Corp., lost a stunning $13.6 million when the stock plummeted 60% in one day.
Moves like these are especially dangerous for options traders given options’ already-volatile nature and expiration dates. Investors don’t have the luxury to “hold the line.” Instead, they risk their trade expiring worthless, especially if that expiration date is just days away.
Now consider a fundamentally superior stock like Digital Turbine, Inc. (NASDAQ:APPS).
With the massive explosion in mobile devices in the past two decades, advertisers are faced with a new dilemma: How do you connect and sell your products with a mobile world of consumers? Enter Digital Turbine, Inc.
The company offers a Mobile Delivery Platform that enables mobile operators, original equipment manufacturers (OEMs) and application developers to better engage and acquire users. In fact, Digital Turbine’s platform provides a Single Tap install capability, which improves the user experience and speeds up the app install process.
Through Mobile Advertising, Digital Turbine allows advertisers and agencies to bypass app stores and connect with users direct-to-device, thanks to native preloads and sponsored recommendations. In fact, the company’s platform has enabled more than one billion app preloads for thousands of advertising campaigns.
The company is a “Strong Buy” and earns a Total Grade of “A” in my Portfolio Grader. Like GME, it earns an “A” for its Quantitative Grade, and that’s where the similarities end. APPS has an “A” for Sales Growth, Operating Margin Growth, Earnings Growth and Return on Equity.
Its stock has also climbed nicely higher since the beginning of 2020 — up more than 1,163%! But that strength has nothing to do with short squeezes or any internet forum; rather, it’s because of the company’s strong fundamentals.
APPS’s earnings soared 320% from $0.05 per share in its fiscal fourth quarter of 2020 to $0.21 per share in its fiscal third quarter of 2021. Following its third quarter in fiscal year 2021, APPS surged more than 50% in less than a week.
The bottom line: Trading fundamentally superior stocks is what will set us up for success.
The truth of the matter is that when investing in long-term call options as we do at Power Options, we don’t have to worry about our trades getting caught up in the market froth.
Instead, we’re betting on super high-quality businesses.
We put booster rockets on my market-crushing stock picking system.
This is the polar opposite of what most people do, even most of the big-name option gurus out there. What most people do in the options market is end up betting on randomness, or on the unpredictability of very short-term market movements.
But the reality is when options are used improperly, that trade is nothing short of gambling. It’s why it’s critical that before we pick the option, we pick the right company that we know has the potential to climb higher because of its strong fundamentals. When you choose randomly, odds are high that you’ll be left holding the bag after the smart money flees the stock, which, as we saw, was exactly the case with GameStop Corp.
So, we buy options on the world’s best companies, give them time to grow and grow, and leverage their success with options.
In fact, I released my first seven options trades this week, and they are all plays on companies that posted strong earnings results in their most-recent quarters.
These are the kinds of stocks I look for as I build my Power Options LEAPS Portfolio
Every one of these stocks has posted at least double-digit earnings and sales growth. And they all beat Wall Street’s earnings estimates, too.
Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owned the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Digital Turbine, Inc. (APPS), Microsoft Corp. (MSFT)
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation.