Bullish, Bearish, Perplexed, Doesn’t Matter — Stay In Shape

The coronavirus crash “cannot be an excuse to not do any work” staying abreast of the market and identifying the companies you want to own when you decide the time is right.

Action Plan

Here’s what to do, whether for real-money investing, or paper trading while you wait for better market conditions:

  1. Articulate a vision of the kinds of stocks you want to own, whether in a paper portfolio because you think its premature to jump back in, or in a real-money portfolio you buy at once or gradually in little portions; 
  2. Build and use one or more screens to identify specific stock ideas;
  3. Evaluate individual candidates as per your usual approach.

Item 1: What you might want to own

The kinds of stocks you should want to own is a personal choice. But in recent days, Dan, Marc, and I have each come up with screens that have some core elements in common:

  • Financial strength is an absolute must; no company, however appealing its story may seem, is worth owning if its balance sheet is weak enough to threaten its ability to survive the crisis or maximize its potential down the road. 
  • Value is nice — all three of us respect it — but right now, it has to less critical than in the past because we don’t know what the E is in P/E, the S is in P/S, etc. And by all means, this is not the time to scour the market’s dumpsters in pursuit of deep- or cigar-butt value. It’s okay to own badly beaten-down stocks, but not based on solely numeric analysis; you also need to be able to make a sensible qualitative case for why you’re in (I, for example, like residential, storage, data center, and medical office REITs, but despise, with every fiber of my being, retail mall and office properties). 
  • We want growth, future growth (which may or may not match historical growth). Because the future may differ from the past (we say this, not as a matter of legalistic boilerplate but because there is likely to be a lot of real truth here), we rely a bit on historical growth numbers but a lot on sentiment and market-based signals that cue us in to the investment community’s assessment of future growth. Our Power Gauge ranking system has a heavy emphasis on this. And this, our model’s consideration of sentiment and market (technical) indicators raises another very important point.
  • Be humble. Don’t try to out-think the room. Contrarianism is fun. It’s romantic. And the market is not perfect, so there is a legitimate place for it. But not today. We’re still in crisis mode. Take advantage of the considerable brainpower out there and let the market, and the data, give you more-credible-then-usual second opinions. Unless you have really particular affinities for particular types of companies, wait until next year to catch the market’s falling knives. We use our “power bar”ratios (bullishly ranked stocks relative to those with bearish ranks) to tell us which sectors are appealing. Our favorites are Communications Services, Healthcare, and Information Technology. If the screens you built, using whichever tool you like, point you there, then you’re probably applying the other principles suggested here. If not, consider adding filters that limit your screening to these sectors. 
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Disclosure: None.

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