Uncover and Monitor Well-Positioned ETFs and Stocks
Congrats! After weeks, if not months, of hard work and answering all of my “10 Questions You Have to Answer Before You Buy Any Stock,” you’ve successfully assembled your target investment portfolio. It’s not easy and odds are it took more work and time than you thought it would. Let’s remember, however, that if it was easy then everyone would do it. And we all know that simply isn’t the case.
While you let out a sigh of relief, I’m reminded of what former Intel CEO Andy Grove once said, “Only the paranoid survive.” Now, I admit that’s a bit harsh, but the gist of what Grove was getting at is we need to be on guard for mishaps, shortfalls and other things that can derail the reasons why you added a company’s stock to your holdings in the first place.
Thinking back to my “10 Questions You Have to Answer Before You Buy Any Stock” from the last several weeks, you’ll remember that questions #3, #6 and #9 dealt with uncovering data points and other signposts that tell the tale of a company’s business. It could be data from the government, third party research firms or some other source, but it has to be something you can track on a regular basis so we can determine the vector (direction) and velocity of the data.
Naturally, we want data that paints a growing, robust or improving picture. But we all know that as much as we might wish and hope for it, that dream scenario doesn’t always pan out. That’s why, like a good hunter that is looking to bag big or little game or maybe even zombies if you’re a fan of The Walking Dead, you have to track data and other signposts to make sure you are on the right path.
For example, when examining shares of firearms manufacturer Smith & Wesson (SWHC), you should be taking a hard look at firearm background check data published by the Federal Bureau of Investigation each and every month. Are background checks accelerating compared to the last few months? Is the number of checks up year over year or not? If so, for how many months? And so on.
If we wanted to monitor how rail companies were doing, we’d look to the weekly railcar loading data published by the American Association of Railroads.
To get a bead on heavy truck demand, we’d keep tabs on the manufacturing economy through monthly industrial production figures published by the Federal Reserve, truck tonnage data published by the American Trucking Association and industry order, production and backlog data that is collected and published by ACT Research.
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Pretty much every industry and company has recurring metrics that will clue you in to the tone of the business, as well as its vector and velocity. It’s not just those metrics we want to track. The answers you’ve turned up to Questions #3 and #4 of my “10 Questions” helped you identify key competitors, suppliers and customers. If something changes with one of or all of them, it could alter the playing field underneath the company whose shares you’ve purchased.
Therefore, you have to pay attention to this continuum of companies. Announcements such as better-than-expected revenues and new product instructions from customers could be bullish for your company. But if a competitor announces a new customer win or new product offering that ups the ante for your company, it could spell trouble.
Aside from these two questions, I’d encourage you to collect your own observations as you move around in your day-to-day life. Are you seeing more of one product than another? What stores are experiencing long lines? Is there a new service that your friends are talking about or one their kids can’t stop using? Are once-busy stores now far less occupied with customers? And so on. Always remember to ask the following important question when you see things like this: “What does that mean?” The answer will help cut to what is really going on. The last thing you want to do is get all excited about a long line in front of a new fast food restaurant only to find out it’s because there was a fire in the kitchen and customers are stacked up waiting for their orders.
As you collect all of these data points -- industry, company, supplier, competitor and customer -- the big question is: how does all of this impact the business of the company you’ve invested in? Said another way, is the data tracking as expected, falling short or stronger than anticipated?
Depending on the answer, it could mean that expectations for a company’s revenues, profits and bottom-line earnings need to be updated. If such adjustments are called for, that could mean the shares need to be revalued and that could alter the upside vs. downside potential to be had.
When we do this, it opens up a host of questions including the following:
Taking stock of these questions and their answers are all part of the regular maintenance you need to perform on your investments. This is not crock-pot investing! In other words, you can’t do all the initial work and simply forget about it.
- Are the valuation metrics you looked at in Question #8 getting stretched too far relative to your company’s peers or historic multiples?
- Are the shares trading at even more attractive valuation multiples than before?
- Has the upside-to-downside trade-off shifted enough to warrant buying the shares or, despite the changes to the valuation metrics, has the potential-upside-to-downside trade-off remained the same?
- Despite the upbeat news, have expectations been revised higher by the Wall Street community during the last few days or weeks?
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To me, it’s a lot like taking care of your car. Once you buy a new car -- or, increasingly, buy a used car -- you drive it home and before too long you’ve racked up a few thousand miles. At that point, you have some regular maintenance on the vehicle -- changing the oil, brake pads, tires and some other things -- that will keep it humming for you. From time to time, there could be damage, maybe from an accident, a rock putting a crack in your windshield, or something else that was unforeseen, that is beyond repair and forces you get a new car. If you forget to change the oil past a certain point, it will start to affect performance of your vehicle. If you forget too long, it could lead to even bigger problems.
Where this comparison breaks down is most people have one or maybe two cars. But in a portfolio, you may have several or as many as two dozen stocks. There is no simple rule that says if you spend X minutes a week on each stock, then you will be fine. There may be some weeks when you spend a lot of time reading up on one particular company. Because of the frequency of the data and other information that you should be tracking, others may take only a fraction of that.
The bottom line is that the more stocks you have, the more maintenance you will need to perform each month. And younger, more aggressive companies take even more time. Buy-and-sleep investing is outmoded. You may want to blame it on the increasingly frenetic Connected Society that we live in that is filled with tweets, posts and “specunews” that are vying for your attention and want you to click or to watch. If you haven’t heard the term, “specunews” is Versace-speak for blogger or other would-be “journalistic” speculation that is billed as news, designed to catch eyeballs.
As I’ve said previously, if you’re not up to the task, it could mean a blended portfolio consisting of several exchange-traded funds (ETFs) and individual stocks instead of all individual stocks is more your speed. There’s nothing wrong with that, particularly since each week it seems there are more niche-driven ETFs hitting the market that mesh with our thematic way of looking at the world.
You’ve probably heard of the cybersecurity-focused fund, PureFunds ISE Cyber Security, with ticker symbol HACK. Another example that was launched in July 2015 is PureFunds ISE Mobile Payments ETF (IPAY), which meshes very well with our Cashless Consumption theme. This ETF counts Visa (V), MasterCard (MA), American Express (AXP) and PayPal (PYPL) among its top holdings. On a combined basis, those four positions account for 24% of IPAY’s overall holdings.
As you can see, one of the more useful aspects of my PowerTrend investing framework is that it helps you uncover well-positioned ETFs as well as stocks.
Next week, I’ll discuss the signs you should look for when contemplating or, in some cases, needing to sell out of a position.
In case you missed it, I encourage you to read my e-letter column from last week about the trade-offs between stocks and ETFs. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.
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