And the playbook I WILL be using to pick stocks with the highest probability of paying off bigtime [Power Trends] How to Avoid the "Turnaround Trap" This Earnings Season
Weâre just a few days into earnings season, meaning thereâs a flood of sales, profit, growth and cash-flow numbers cascading our way. On all sorts of companies. In all sorts of industries. And itâs not just numbers ... itâs also âspinâ â as execs shift into âwhat comes nextâ mode for their companies in the last half of the year. Tomorrow, 35 companies report earnings. The next day, thereâll be 64 of them. And by next week, weâll be getting anywhere from 100 to 400 earnings reports per day â for the next four weeks. I expect earnings will be good. Not for everyone. But for tech, industrials, and discretionary â which have all been growing, delivering sales-and-profit surges quarter after quarter. Investment-banking heavyweight Goldman Sachs doesnât share my optimism. At least, not in the public research note it released last week: âRevenues are expected to post no year [over] year growth for the first time in 10 quarters,â the Goldman analysts wrote. âWhere we do see profit margins rise, itâll mostly be from companies charging higher prices while their input costs arenât inflating as much. MarketWatch put a finer point on it with this headline: âThis earnings season, expect companies to keep margins high the usual way, by firing people.â Translation: Companies arenât seeing business growth, so theyâre playing the usual games to get profit or margin growth. So, what do you do with all this? Well, when the headlines get this pessimistic, there are two approaches you can take with your stocks...
- âGreat! When other people dump stocks on bad news, I can swoop in and buy at a discount. Surely, Iâll make tons of money when the stock bounces back later.â
- âYeah, Goldman, not sure I see things your way. There are plenty of companies whose fundamentals are in great shape. And Iâm going to bet on those.â
Me? Iâm in the second camp. And with good cause. In an earnings season where thereâs so much uncertainty, thereâs also lots of risk. Itâs more important than ever to stick with the very best companies. Those are companies whose stocks will rebound when investors realize that theyâre undervalued (i.e. âcheapâ). But a rebound is very different from a turnaround â where youâre betting on a company with sketchy financials, hoping the execs of that firm will finally figure things out and customers will come around. Thatâs a risky move to take... especially as we navigate this avalanche of earnings. In fact, Iâd actually label this approach as the âturnaround trap.â And here in todayâs Power Trends, Iâm going to show you why. RECOMMENDED LINK [An-E Predicts Tesla Stock with Remarkable Accuracy?](
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The belief that an unloved company is poised for âthe comeback of the yearâ can be very seductive. But where most other folks see a turnaround in the making, I see a dumpster fire. It may just keep burning until everything turns to ash... and, you know, it stinks. So, when I look into a company and find that sales and profits are shrinking â and see that itâs taking on debt to make ends meet â Iâm flat out not interested. Iâd rather buy when a company ticks all the boxes for financial strength on the fundamental side â and when its shares are a magnet for money from big institutional players. In fact, there are 29 factors I consider when creating my overall [Quantum Score]( grade for a stock. My strategy combines fundamental, technical and money-flow components â and is a lot like the classic âCAN SLIMâ method created by Bill OâNeill, the stockbroker who founded Investorâs Business Daily back in the â80s. (Except that I have a much more powerful computer I can use to run my statistical analysis on more than 6,000 stocks every day.) As a reminder, CAN SLIM stands for:
- Current quarterly earnings growth
- Annual earnings growth
- New product/service, management, or price high
- Supply and demand (accumulation on heavy volume)
- Leadership in its industry
- Institutional ownership of the stock
- Market direction: Is the stock in sync with the broader trend?
With apologies to Stephen Covey, you can also think of them as the âseven habits of highly effective stocks,â because these are âcluesâ that tell you a stock is about to embark on a big run. In Bill OâNeillâs day, it was Texas Instruments (TXN) and Microsoft (MSFT) that lined them up just right for huge gains. To see the type of stocks Iâm finding today with my fundamental and technical analysis, [watch this](. A stock can surge without hitting all these marks â underdogs do occasionally win, of course. But these tend to be longshot bets â and their rallies can flame out just as quickly as they started. If youâre even a tiny bit late to the game, youâll probably miss most of the gains. Thatâs the challenge investors faced with âturnaroundâ meme stocks like GameStop (GME) and AMC Entertainment (AMC) back n 2021:
You had to time your entry and exit exactly right (or have access to a time machine) to actually make money on these stocks. So, I stick with what works for the true âsmart moneyâ players: the Big Money investors who work to keep their moves secret, and who I was able to track during my time as the head of a major Wall Street trading desk. I look for one- and three-year sales-and-earnings growth. I look for double-digit profit margins. Slim margins donât cut it for me. There are plenty of other fish in the sea that do [meet my criteria](. And even if the company is making a bunch of money, I study the debt load to make sure itâs not overleveraged. Bottom line: I follow the money flows â but I wonât follow them into a roach motel. Iâm not interested in the turnaround story unless (and until) sales and earnings show that company is already making money. Then I wait for the stock to hit my [Quantum Edge]( âbuy zone.â Once that happens, Iâve got at least a 70% chance of making money. And, over time, by sticking with the high-quality stocks that Big Money pros are buying, my strategy beats the market 7 to 1. And since I launched [Quantum Edge Pro]( weâre sitting on nine winners with average gains of 21% in our first nine months. Our five other stocks are down a mere 6.5% on average. Many of these top-ranked stocks are still in the buy zone now. If youâd like the details â including the new buy recommendations Iâve started making â [click here to learn more](. Talk soon, [Jason Bodner]Jason Bodner
Editor, Jason Bodnerâs Power Trends [866.385.2076](tel:+866-385-2076) | support@tradesmith.com
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