Behind Louis’ recent “Sell” recommendation… do you have your own plan?… signs of frothiness

 

Over the last six years, payments giant PayPal (PYPL) has crushed the S&P 500 nearly 6-to-1…

It’s also a darling of the analyst community, receiving an overwhelming “Buy” rating…

Plus, the company continues to reinvent itself, expanding its service offerings.

For example, PayPal now has a dedicated cryptocurrency unit… it’s expressed interest in moving into banking and stock trading… and it’s at the forefront of sector trends, including “buy now, pay later,” which we profiled here in the Digest last week.

There’s a lot to like here, right?

It certainly seems that way – which is why it caught my eye when famed investor Louis Navellier issued a “Sell” recommendation on PayPal to his Growth Investor subscribers on Monday.

***Being disciplined and sticking to your investment plan

Regular Digest readers know that Louis is a numbers guy. His market approach is rooted in objective, impartial numbers.

A well-defined, strict set of criteria guides him into elite stocks. And just as importantly – if not more importantly – those same criteria alert Louis when it’s time to sell.

It’s then up to Louis to show the discipline to actually follow through… even though a stock might appear to offer plenty of reasons to hold.

Here’s how Louis describes this:

I don’t believe in falling in love with a stock. I’m a numbers guy… and when the numbers turn south, I get out.

So, returning to PayPal, what prompted Louis’ “Sell” recommendation?

Simple – the most recent numbers didn’t measure up to his strict criteria.

From Louis’ Growth Investor Flash Alert:

Fiscal year 2020 was a record one for PayPal, and much of this momentum carried over into 2021.

But the company’s earnings and sales momentum have recently tapped the brakes, as new active accounts slipped 47% year-over-year to 11.4 million in the second quarter. Total payment volume rose 36% year-over-year to 11.4 million…

Looking forward to fiscal year 2021, PayPal now expects full-year earnings per share to rise about 21% year-over-year to $4.70. The earnings forecast was slightly lower than analysts’ projections for full-year earnings of $4.73 per share.

As a result, third-quarter earnings estimates have been lowered and institutional buying pressure has started to dry up.

PYPL slipped to a D-rating in Portfolio Grader over the weekend, due to a D-rating for earnings growth, an F-rating for earnings momentum and a D Quantitative Grade.

Let’s take this as our cue to exit.

And just like that, PayPal is gone from the Growth Investor portfolio (for a 265% gain).

***The critical importance having your own plan

Today, there are plenty of reasons to believe the stock market will continue climbing.

But there are also reasons why stocks could suffer a painful drawdown.

Louis has a plan for either scenario. Do you?

More specifically, what’s your “Sell” plan?

Yesterday, legendary short-seller Jim Chanos said that we’re entering a dangerous time in the stock market.

From CNBC:

Short-seller Jim Chanos warned that retail investors late in the game could be left holding the bag as more red flags emerged in a speculative stock market.

“The problem with getting more people, retail, involved is that it always seems to happen toward the end of every cycle. Retail wasn’t there at ’09 at the bottom. They weren’t there in ’02 after the dot-com bubble collapsed. They were certainly there at ’99,” Chanos said Tuesday on CNBC’s “Squawk Box.”

“So the problem in the last few cycles as I see it is that we get promotors and insiders and people who have done very well cashing out as retail is buying.”

What are the signs that retail is buying?

Well, 2021 has seen more inflows to stocks than the past 12 years… combined.

From Axios, back in April:

Money flowing to stocks globally in just the past five months ($576 billion) has exceeded the inflow seen over the prior 12 years by well over $100 billion, according to data from Bank of America Global Research…

Record sums of cash have flown into equity funds this year with the No. 1 and No. 2 largest inflows to stock funds ever both occurring since the start of February.

Don’t think this trend slowed down as we hit summer.

In June, retail investors bought nearly $28 billion of stocks and ETFs, according to data from Vanda Research’s VandaTrack. That’s the highest monthly amount since at least 2014.

And it’s not just “more money from the same retail investors.” It’s new retail investors joining the party.

JMP Securities estimates that investors opened more than 10 million new brokerage accounts in the first half of this year.

Keep in mind that this huge inflow comes thanks, in large part, to massive amounts of leverage.

As of February, investors had already borrowed $814 billion against their portfolios – a 49% year-over-year increase (the largest since 2007).

And the high before that? The Dot-Com Bubble in 1999.

By the way, for some fun trivia, can you guess how many new highs the S&P 500 has enjoyed since its pandemic bottom in March 2020?

64.

***So, does this mean it’s time to sell your stocks?

Not at all.

But it is time to know when and why you’ll sell your stocks.

In other words, it’s time to make sure you have an exit plan.

Yes, there’s a healthy amount of craziness in today’s market. But craziness can last a long time. And periods of craziness can mint literal fortunes for investors.

Plus, think about one very big difference this time around…

We’re in brand-new territory when it comes to the mind-boggling amount of new currency that’s sloshing around the United States (and the globe).

Specifically, the U.S. Federal Reserve, the European Central Bank, and the Bank of Japan have exploded their combined assets to $24 trillion.

Frankly, that number is too big to grasp. So, take a look at this visual from Bloomberg.

In other words, $24 trillion is the same as the combined market caps of…

Apple, Facebook, Tesla, JPMorgan, J&J, Walmart, Nestlé, Amazon, Coca-Cola, Netflix, Nike, AT&T, Microsoft, Tencent, McDonald’s, Boeing, Christian Dior, Sony, Uber, Alphabet, Airbnb, Nintendo, LVMH, United Health, PayPal, Oracle, BP, TSMC, VISA, Samsung, Kweichow Moutai, Bank of America, Softbank, Nvidia, Home Depot, P&G, Walt Disney, Toyota, Exxon Mobil, L’Oréal, Pfizer, Intel, Meituan, PepsiCo, Alibaba, Costco, Morgan Stanley, AIA, Unilever, Citigroup, Volkswagen, China Mobile, Starbucks, Goldman Sachs, IBM, HSBC, 3M, General Electric, Estée Lauder, Zoom, Airbus, S&P, Micron, Xiaomi, General Motors, Dell, Adidas, Colgate, BMW, Baidu, Moderna, Twitter, Spotify, eBay, Lululemon, Kimberly-Clark, and Mitsubishi.

You might also think of this $24 trillion as a massive wad of chewing gum… capable of becoming the largest bubble in history before it eventually pops.

But…

That could be a long way away.

In any case, the great thing about having a plan is “no thinking.” You don’t have to time the market. You don’t have to guess at where we are in the cycle, or where the eventual top will be.

You simply follow your rules for buying and selling.

That’s what Louis just did with PayPal, as he has done for decades… and it’s resulted in one of the most respected track records in the investment community.

Today, let’s be optimistic about the party continuing. But let’s have our exit plans in place for when the music stops.

Have a good evening,

Jeff Remsburg