For the stock market, August and September are
typically two of the weakest months, and
this year is turning out to be no
exception.
So, I’m making what is hopefully a safe bet by
repeating a stock selection strategy that I first published just a
little over two months ago, on June 2. Why?
From June 2 through August 21, that five stock
portfolio returned 17% compared to the S&P 500’s 3% return. It’s a
contrarian strategy, meaning that it involves buying stocks that
most stock analysts are advising selling. Here are the details.
Use Finviz Screener
As usual, I’ll use the free Finviz stock screening
program to describe how to build the portfolio. Why? The Finviz
screener is free, user friendly, and offers a wide range of useful
screen selection choices.
Start by selecting “Screener” on the toolbar located
near the top of the Finviz homepage (finviz.com). Then select “All”
on the Filters bar to see the available screening filters.
Set Up Screen
Because the U.S. economy is currently the strongest,
limit your list to U.S. based stocks. Do that by using the Country
filter and specifying “USA.”
When "Hold" Means "Sell"
Next, limit your list to stocks that most stock
analysts are advising selling. Here’s how.
Although analysts use a variety of terms to describe
their buy/sell opinions, Finviz boils them down to “strong buy,”
“buy,” “hold,” “sell” and “strong sell”. Except for “hold,” the
meanings are self-explanatory.
However, to avoid annoying company executives, many
analysts rate stocks at “hold” when they really mean “sell.”
Consequently, for our purposes, “hold,” “sell,” and “strong sell”
all translate to “sell.” Thus, specify “hold or worse” using the
Analyst Recommendation filter to limit your list to stocks analysts
are advising selling.
Earnings Growth Drives Share
Prices Up
I’ve found that share prices track earnings per share
(EPS) closer than any other single factor. However, even though
they’ve forecast strong earnings growth numbers which should drive
share prices higher, for reasons unknown, many analysts rate those
same stocks at some variation of "sell."
So, specify “Over 30%” for EPS Growth This Year and
“Over 25%” for EPS Growth Next Year to limit your list to stocks
expected to be the fastest EPS growers.
Profits Count
All else equal, stocks issued by profitable companies
typically outperform unprofitable stocks. So, use the Return on
Equity filter, which compares Net Income to Shareholders Equity, and
specify “Over +5%” to limit your list to profitable stocks.
Follow Smart Money
Institutional buyers such as mutual funds and hedge
funds typically have access to information that we never see. So,
specify “Positive” for Institutional Transactions to limit your list
to stocks that these ‘wired-in’ players have recently been buying.
Avoid Cheap Stocks
Contrary to what you might think, cheap stocks get
that way for a reason and tend to underperform. So, specify “Over
$10” using the Price filter to rule out the cheapest plays.
Make Trend Your Friend
Finally, since share prices tend to move in trends,
use the Performance filter to specify “Month Up” and the Performance
2 filter to specify “Week Up” to limit your list to uptrending
stocks.
Down Market Yields Only Two Picks
Only two stocks passed these
tests when I ran the screen on August 28. Both pay significant
dividends.
•
Cal-Main Foods (CALM): Egg producer pays a 6.3% dividend yield.
•
Crescent Energy (CRGY): Crude oil and natural gas producer pays a
4.7% dividend.
These are my ideas, but do your own due diligence.
The more you know about your stocks, the better your results.
