March Madness: stock selection criteria for savvy fans and smart investors
By Scott Kyle, Chief Investment Officer at Coastwise Capital Group
With the college basketball tourney in full swing – and millions of devoted fans pouring over bracket picks – it’s a prime time to discuss the topic of stock selection criteria.
Market commentators often say, “It’s a stock pickers’ market.” Unless you are buying thousands of publicly listed securities throughout the world, by definition you are always a stock picker. But there are times when stock picking becomes even more essential to determine returns — and we are likely now in one of those periods.
Let’s split the market into 3 buckets: wildly overvalued (think 1999), hugely undervalued (like March of 2009) and fairly valued. It is within this final context that stock selection becomes most important to achieving superior returns.
Opportunities arise when great companies temporarily falter, providing investors the chance to buy securities at 10% – 20% reductions. It is like a micro-crash: rather than the whole market dropping, a given stock drops due to a non-fundamental issue, yielding the opportunity to pick up relatively inexpensive shares.
But you need to have the ammunition – the cash — to take advantage of such scenarios, as well as a watch list of high quality companies. If your portfolio consists of 30-50 positions, you should have another 50-100 companies you monitor regularly: that way, if opportunity strikes and one of these companies makes the “% losers” list for the day, you won’t be starting from scratch on your research. That said, it is important to note that there is bad news, and then there is bad news. Sometimes stocks crack because the company is broken. In this case, you should resist the temptation to purchase what may appear to be a bargain but may instead be a falling knife. This is usually the case when the news relates to restating financials or executive departures. Monitor the situation but don’t pull the trigger yet. There are often additional down legs to be had, especially as all the investment banks pile on their after-the-fact downgrades, putting further near-term downward pressure on the stock. In contrast, the opportunities I am referring to occur when good companies falter on a short-term basis.
The reality is, it is always a stock pickers’ market – and this phrase is just a cute term financial commentators use when they want to look smart but have nothing meaningful to say about the overall market. However, after big run-ups like we’ve had nearly unabated since October 2011, where stocks in general are neither screaming buys nor shrieking sells, knowing how and when to pick up some shares on the cheap can be a good way to reduce risk in your portfolio and enhance returns. In the meantime, enjoy the tourney – and contact us at your local San Diego money management firm to learn more: www.coastwisegroup.com.
The information in this article is strictly for educational and illustrative purposes and is not an attempt to furnish personalized investment advice or services.
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