“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 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 are on the decline.
On September 8, GameStop, Inc. unveiled second-quarter results that fell short of analysts’ expectations. During the second quarter, revenue rose 26% year-over-year to $1.18 billion, 5.4% above consensus estimates for $1.12 billion. The company also reported an earnings loss of $0.76 per share, up 54% year-over-year, but this was still wider than analysts’ call for an earnings loss of $0.66. So, GME posted a 14.3% earnings miss.
Interestingly, the company is under new leadership and no longer sees itself as a retailer but rather a tech company. The new leadership claimed in the earnings meeting, “We are evolving from a video game retailer to a technology company that connects customers with games, entertainment and a wide assortment of products.”
However, company management did not expand any further on its new business model. Perhaps the only things GME has in common with start-up tech companies is that it has lost a significant amount of money this year and lacks strong fundamentals.
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.
For GME, since its earnings release, the stock is down 15%.
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.
Strong Earnings Result in Strong Stock Moves
Now consider a fundamentally superior stock like Technoglass, Inc. (NASDAQ:TGLS).
Tecnoglass, Inc. was the very first Colombian company to be listed on the NASDAQ back in 2013. The company started operations in April 1994, producing bullet-resistant, curved, insulated, laminated, screen-printed and tempered glass. And over the past 27 years, Tecnoglass has expanded its business to also include aluminum products and hardware that are used to manufacture architectural glass settings, like doors and windows.
Today, Tecnoglass is the number-one architectural glass transformation company in Latin America, as well as the second-largest glass fabricator in the U.S. Overall, Tecnoglass supplies its products to more than 1,000 customers around the world. And the company manufactures its three main brands—Tecnoglass, ESWindows and Alutions—at its fully integrated facility in Barranquilla, Colombia. Thanks to the housing boom here in the U.S., Tecnoglass has experienced strong demand for its products in the single-family residential space.
So, it should come as no surprise that the strong demand translated into stunning results for its second quarter, released on August 6. Second-quarter revenue jumped 48.5% year-over-year to $121.7 million, up from $81.9 million in the same quarter a year ago. Revenue in the U.S. accounted for $109.9 million, as the housing boom continued to drive the recovery in commercial construction. Analysts were expecting total second-quarter revenue of $106.22 million.
Tecnoglass also achieved adjusted earnings of $19.7 million or $0.41 per share, which was up 109.6% from the $9.4 million, or $0.20 per share, reported in the second quarter of 2020. The consensus estimate called for adjusted earnings of $0.31 per share, so Tecnoglass beat estimates by 32.3%.
Company management stated, “I am thrilled to announce our most profitable quarter on record, building on our team’s outstanding performance, which again drove record results in nearly all financial metrics… the future remains extremely bright for Tecnoglass and we are firmly situated to deliver another year of record results in 2021.”
As a result, Tecnoglass increased its outlook for fiscal year 2021. The company now expects full-year revenue between $450 million and $465 million, which is up from $374.92 million in 2020.
The stock has climbed steadily higher on the heels of its strong earnings results — up about 13% (it hit a new 52-week high today) in comparison to GME’s 15% decline. But that strength has nothing to do with short squeezes or any internet forum; rather, it’s because of the company’s strong fundamentals.
The bottom line: Trading fundamentally superior stocks is what will set us up for success.
I take a similar approach with Power Options, except I trade LEAPS options (Long-Term Equity Anticipation Securities) on fundamentally superior stocks rather than trade just the stock. The benefit of LEAPS trades is that 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. Just like the rest of my publications, I look for companies with superior fundamentals and companies that posted strong earnings results in their most-recent quarters.
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns 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:
Technoglass, Inc. (TGLS), Microsoft Corp. (MSFT)
Louis Navellier, who has been called “one of the most important money managers of our time,” has broken the silence in this shocking “tell all” video… exposing one of the most shocking events in our country’s history… and the one move every American needs to make today.