Software is up huge … yet Louis’ system just signaled that he should sell a big-gainer … how Louis is setting up for outsized returns in today’s market
Ten years ago, famed venture investor, Marc Andreessen, penned a now-famous phrase …
“Software is eating the world.”
From his op-ed back in The Wall Street Journal back in August of 2011:
In short, software is eating the world …
More and more major businesses and industries are being run on software and delivered as online services — from movies to agriculture to national defense.
Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures.
Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.
How foresighted he was. And had an investor acted upon Andreessen’s article, it would have paid off handsomely.
Below, we look at IGV. It’s the iShares North American Tech-Software ETF. It holds software heavyweights including Microsoft, Salesforce, Adobe, Oracle, Intuit, Autodesk, and Zoom.
As you can see, over the last 10 years, IGV has topped the S&P by about 150%. And keep in mind, this happened as the S&P was enjoying one of the strongest bull markets in history.
Of course, IGV is an ETF, so its returns reflect dozens of companies, some of which have produced only ho-hum results. This means select, leading software companies could have made investors vastly greater sums.
Take Adobe, the document/communication software company that you’ve almost certainly used.
Below we show the same chart as above, yet add in Adobe’s performance. As you can see, it has returned 1,320% for investors. That’s 5-times more than the S&P.
As we stand today, software remains nothing short of critical for tomorrow’s technologies — Adobe’s included.
That’s why yesterday’s update from famed investor, Louis Navellier, caught my eye …
He just recommended his Growth Investor subscribers sell their Adobe position, locking in a gain of roughly 100%.
***If software is (still) eating the world, and it’s a pillar of tomorrow’s tech-saturated economy, then why sell now?
Because Louis is a quantitative investor who has strict rules that guide his investment decisions. When these rules are violated, he sells.
Emotions along the lines of “but this stock has treated me so well!” don’t carry weight. If the numbers begin to weaken, Louis sells. End of story.
This strict adherence to a numbers-based system is why Louis has one of the most envied, multi-decade track records in the industry.
Today, let’s look at what went into Louis’ sell-decision, then expand our focus to how you can be just as ruthlessly impartial as you analyze your own portfolio. We’ll point you toward a free tool you can use to evaluate the fundamental strength of your own stocks.
Bottom line — emotions trip us up … numbers guide us forward.
Let’s see how Louis just put this into practice with Adobe.
***A significant drop in institutional buying pressure changes the investment thesis
For newer Digest readers, Louis is a market legend. Over the decades, he 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.
It’s this use of predictive algorithms that led Forbes to name him the “King of Quants.”
But a quant approach doesn’t just highlight strong stocks to buy … it flags weak stocks to sell.
And yesterday, the King of Quants sold market-darling, Adobe.
From Monday’s Growth Investor Flash Alert:
… buying pressure has started to ebb in some big flagship stocks and a leadership change is now underway in the stock market.
As a result, the “Alpha” that we calculate in Portfolio Grader is starting to diminish and Quantitative Grades are falling — and that has led us to exit perfectly good, high-quality stocks in recent weeks.
Well, today (Monday), another one of our High-Growth Investments stocks has seen a significant drop off in institutional buying pressure and its Quantitative Grade slipped to a D-rating over the weekend.
So, I recommend that we take advantage of today’s market strength to book our triple-digit gain.
What I find interesting — and instructive — is that Louis recommended the sale despite Adobe’s respectable earnings and sales forecasts. He did this because, more important to him than these forecasts, was the immediate dip in institutional buying pressure.
This is a helpful reminder that at the end of the day, what drives a stock price is actual buying.
After all, you might have the most amazing stock ever … gushing with cash-flow … paying a fat dividend … sitting on a fortress balance sheet …but if no one wants to buy it, the stock price won’t budge.
Back to Louis:
(Adobe) still has solid forecasted earnings and sales growth. For the first quarter, the analyst community is looking for 22.5% year-over-year earnings growth and 21.6% year-over-year sales growth.
But I’m concerned with the overall drop off institutional buying pressure, as evidenced by its D Quantitative rating and overall D-rating in Portfolio Grader.
So, I recommend that we sell ADBE today.
The decision was that black-and-white.
No special consideration because it made subscribers 100% … no second-guessing … no excuses to keep it in the portfolio.
Numbers. Not emotions.
***An easy, free way to check on the fundamental strength of your own stocks
While Louis’ Growth Investor subscribers are the beneficiaries of this numbers-based approach, Louis created a free tool based on the same principles to help non-subscribers.
Called the Portfolio Grader, it’s a diagnostic that gives investors an instant snapshot of a stock’s financial strength. It evaluates a security through the same criteria that drive Louis’ proprietary stock selection strategy.
It analyzes eight key fundamental factors:
— sales growth
— operating margin growth
— earnings growth
— earnings momentum
— earnings surprises
— analyst earnings revisions
— cash flow
— return on equity
Here’s how Adobe now measures up …
And here’s Adobe broken out into its sub-ratings …
Again, click here to give it a spin with your own holdings.
***A reminder to check out Louis’ new service, Power Options, as a way to capitalize on fundamentally-strong stocks
While you eliminate fundamentally-weak stocks from your portfolio, a reminder that Louis is offering a new strategy to benefit from fundamentally-strong stocks — Power Options.
This brand-new service blends his quant-based market approach for finding winning stocks with long-dated call options, which can turn respectable market gains into triple- or quadruple-digit winners.
For example, Louis holds a high-quality retailer in his portfolio (I won’t reveal it out of respect for Power Options subscribers).
Since March 5 (the open date of the trade), the stock has climbed 5.5%. That’s more than respectable for a week-and-a-half.
Meanwhile, Louis’ power option on this stock is up 25% over the same period. That’s the benefit of a well-chosen option on a fundamentally-strong stock.
From Louis’ update last Friday:
Our Power Options Portfolio is chock full of fundamentally superior stocks, so I look for investors to scoop up shares of these stocks and drive them higher. This, of course, will give our call positions big boosts, too …
The bottom line: With these trades, we are “locked and loaded” for many months to come.
To learn more about Power Options, click here. You’ll be able to watch a replay of Louis’ recent special event in which he delved into more details on his strategy. At a minimum, you’ll be a wiser investor with a new awareness of a powerful market tool you can use to juice your portfolio returns.
Wrapping up, it will be interesting to see what happens with Adobe going forward. Yes, the stock could continue to climb. But wise investors realize that such future movements are beyond their control, and therefore, irrelevant.
The only thing investors can control is their process. And that means staying faithful to whatever market approach guides their investment decisions.
For Louis, that means a strict adherence to impartial, quantifiable numbers — when strength is present, stay invested; when it dries up, sell, independent of your emotions.
It’s hard to argue with Louis’ multi-decade-long track-record based on this approach.
Have a good evening,
Jeff Remsburg
