The Investor Weekly recommends that you look for stocks that possess these FOUR key attributes to find the top investment opportunities.
Top Investment Opportunities – 4 Key Attributes to Look For
1. Growth and Addressable Market
Look for a stock that continues to show double- and triple-digit earnings growth over time. And make sure that the company’s growth is fueled by a large addressable market.
Let’s take for example, Match Group (“MTCH”). The company recently stated that according to a study by Stanford University, 40% of all heterosexual marriages in the US are now starting online. The Tinder parent believes its brands play an important role in facilitating relationships both inside and outside the US and sees significant opportunity for continued growth.
MTCH exhibits the type of growth rates we look for.
2. Common Economic Sense
Make sure that the business model makes economic sense.
Enter WeWork. The company uniquely positioned itself to take advantage a commercial real estate market worth an estimated $15 trillion. Yes, your read that right – trillion. WeWork turned to the bond market in 2018 amid fantastic profit projections. However, what investment documentation showed was that in 2017 WeWork had lost $883 million on $886 million in revenue. Eyebrows raised.
WeWork then filed for an IPO in 2019 with the goal of raising $3.5 billion. In August 2019, when the company officially filed its S-1, it revealed that it had been suffering heavy financial losses. In fact, the company had now lost $1.9 billion on $1.8 billion in revenue. This drew widespread media attention and a giant question mark over the company’s chances of future profitability. Institutional investors tore into the offering and criticized WeWork’s accounting, loose governance, and extreme valuation. The model didn’t work from an economic perspective and the IPO was canceled.
Now this is not to say that nascent companies that may initially be losing money cannot one day become profitable. Well known companies such as FedEx, Amazon, ESPN, and Tesla Motors, for example, all took more than five years to generate positive earnings. Additionally, there are a variety of companies with billion-dollar + valuations that continue to operate at a loss. There’s Snap, Zillow, Uber, Lyft, Pinterest, and Spotify, just to name a few.
The Power of Being Selective
The point we are trying to make is to be selective in your analysis. Do your due diligence. It’s good to be a skeptic. Question the company’s financials, mounting losses, earnings adjustments and accounting tomfoolery. And carefully consider whether or not the company can achieve not just growth, but true profitability and positive cash flow.
A perfect example of this is Square. Square has a great growth story, but did not achieve positive net income until TTM 2019. Revenue continued to outpace COGS and SG&A over the past five years. And despite competition from various third-party payment services, we believe Square has a sustainable advantage as a result of its seller ecosystem acting as a strong complement to its consumer ecosystem. The business fundamentals work. SQ currently lags behind other incumbents in terms of total payment volumes, but its hardware advantage and mastery over marketing proves its mettle.
3. Momentum and Earnings Beats
The thought process here is that companies should be growing earnings and exceeding wall street expectations. This shows management’s ability to execute.
How do you spot a momentum stock? A momentum stock is a stock with high returns over the past 3 to 12 months. Investors will notice that a momentum stock exhibits relative strength compared to the overall market over a specific timeframe. The Investor Weekly looks for stocks which have outperformed at least 90% of all stocks over the past 12 months. When major indices decline, a great momentum stock exhibits strength by holding their highs. When the major indices rally, momentum stocks typically lead the rally and make new highs.
For technical analysis, indicators such as the Moving Average Convergence (MACD) and Relative Strength Index (RSI) are instrumental in helping us to measure the strength of an asset’s momentum. The Investor Weekly uses StockCharts.com to accomplish this.
Financial Sheet Momentum
Potential momentum stocks should show on their income statements (when comparing Y0Y) and balance sheet that they are growing at an accelerated rate.
Another factor is the Earnings per Share growth. Double or tiple-digit earnings per share growth is needed to qualify a momentum stock. Stocks with accelerating rates of EPS growth over previous quarters may also considered.
Did reported earnings exceed analyst forecasts? We reported on Danaos Corporation (“DAC”) a few months back. This Company has a strong history of positive earnings surprises. In the last two years, the Company has reported 8 EPS beats and 7 revenue beats. The below shows EPS.
DAC’s price performance is also spectacular compared to the S&P 500.
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And here is price performance relative to the sector median.
For momentum investors, a potential stock should show an ROE of 17% or better.
The stock’s per share price and daily trading volume are also factors used to spot a momentum stock. Momentum investors seek stocks that have high trading volumes. Very low trading volumes may indicate that the markets lack interest. Investors should seek stocks with a minimum volume of 100,000 shares or at least see the average daily volume increase as the value of the stock rises.
In general, stocks that trade at very low prices is that they are out of favor with the market. At the Investor Weekly, we tend to avoid stocks trading below $5.00.
4. Positive Long-Term Trend
250 is the magic number. The 250-day moving average is an excellent way to gauge a stock’s long-term trend and price momentum. There are roughly 250 trading days in a year and, therefore, this average is essentially a 12-month moving average. Intuitively, a rising 250 is indicative of a company’s value creation and strength. When the slope is positive, which is what you want to see, the number of buyers exceeds the number of sellers.
We can see a strong uptrend in the 250 MA line from December 2020 onward. It’s no surprise that DAC’s fundamentals have been incredibly strong this year, as the marine transportation company continues to capitalize on global shipping trends post-pandemic.
Here is another example. This is the 5-year price chart for Domino’s Pizza (“DPZ”). You can see the 250-day moving average line in blue; the long-term trend exhibits a positive slope and DPZ’s return has been tremendous. DPZ has returned more than 280% over the last five years, which is more than double the S&P 500.
Combining all of these attributes makes a solid foundation for finding top investment opportunities.
We have also done an in-depth analysis of Danaos Corporation. You can find it under our Buy List.
Match Group: https://web.stanford.edu/~mrosenfe/Rosenfeld_et_al_Disintermediating_Friends.pdf