4 Ingredients For Beating This Market

This is now the 2nd longest bull market in modern history. That means the easy money has already been made and valuations are near fully engorged. Gladly, there is not much fear of a bear market either.

When you add it all up it says the bull market is still on. Just that the pace of gains for the broader market is slowing down to around 5% per year....10% if we are lucky.

I know that doesn't get your heart racing. But compared to the unspectacular returns for cash and bonds it is a pretty fair shake.

To be clear, these modest gains are the likely outcome if you stick with most mutual funds or index investing. Gladly there are proven strategies that can help you select better stocks and handily beat the market.

Below I share with you the 4 essential ingredients for selecting the best stocks at this time. I truly believe that following these strategies can lead to doubling, even tripling, the average market return.

Ingredient #1: Value

2013 was a gangbuster year for the stock market with 32% gains for the S&P 500. All you had to do is strap yourself to the best growth stocks and the money would just roll in.

That party came to a screeching halt in 2014 as overpriced growth stocks were violently punished. Since then it pays to be much more selective.

The problem is that most investors have a set of historical standards for what they believe equates to a value stock. I am referring to certain measures of PE or Book Value or PEG etc. that typically denote an undervalued security. Unfortunately, 8+ years into a bull market you will discover that most every stock is above those water marks. And that is most certainly true in an investment landscape that has never had bond rates this low making stocks all the more attractive by comparison thus driving up valuations.

Or let me put it another way. Those looking for absolute value based on these historical measures will find no stocks in their basket. So the key is to use relative value measures to squeeze out additional gains. That is where the Zacks Value Score comes into play.

For example, our "A" rated value stocks are in the top 20% in terms of the value criteria that have been proven to lead to outperformance. Combine that with "B" rated stocks and you will be focused on the top 40% of value stocks available. These stocks should make up the bulk of your portfolio. And yes, do strongly consider selling those with D or F ratings for this important criteria as they will prove to be a drag on your portfolio.

Ingredient #2: Positive Estimate Revisions

You knew that I was going to say this as it is the power behind the Zacks Rank and its 25% average annual return. Let's speed up the discussion and simply say that positive estimate revisions give you an edge in every market environment. That's because these are the companies with the healthiest growth prospects, which is a beacon signaling investors towards the shares.

Ingredient #3: Increase International Exposure

For most of the past few years it paid to be US centric with one's portfolio. That is because Europe was headed in the wrong direction. Plus, you had storm clouds hanging over China.

Gladly the storm has past and these large economies, as well as Japan and Brazil, are showing clear signs of strength. So it pays to increase international exposure at this time. You can do this by picking some of the best ADRs. Or just focus on US based companies with a large global footprint.

Ingredient #4: Overweight Small Caps

Typically bull markets are times when investors are willing to be more speculative with their stock selection. Amazingly, for the better part of the last few years the script was flipped and conservative large cap stocks are the outperformers as investors avoided risk. Now those ultra-conservative names are played out and small caps should be in a position to take the lead.

Yes, these smaller stocks are generally riskier, but if you also consider the points above about value, positive estimate revisions and more international exposure, you will put the odds squarely in your favor. Also you should consider having more stocks in your portfolio, each with a smaller allocation. This form of diversification also helps mitigate risk so you can enjoy greater rewards.