The Smartest and Safest "Buy" List?

Lou Basenese

Wednesday, May 18, 2022

Last week, I told you that we needed a major leg down for the top indexes before stocks finally bottom out. And it might be starting today!

As I write, the Dow is off 2.5%, the S&P 500 is down 3.1% and the tech-focused Nasdaq is leading the way down, dropping 3.6%.

Granted, we might still have farther to go. But now is absolutely the time to start thinking about putting capital back to work. Smartly.

With that in mind, today I’m sharing what I believe could be the smartest and safest “Buy” list and strategy in existence.

Let me explain…

Earnings Dysfunction

Understandably, all investors’ eyes right now are on the Fed and the magnitude of future interest rate hikes. Lots more are coming to fight inflation. We just don’t know how many more.

And while that’s immediately important, it’s not what will ultimately determine the long-term trajectory for individual stock prices. That distinction belongs to earnings.

Remember, over the long run, stock prices always follow earnings.

With that in mind, in recent weeks I’ve instructed you to focus on three key earnings stats to objectively determine the future direction of the market…

  • The Revenue Beat Rate — The percentage of companies reporting higher than expected sales figures.
  • The Earnings Beat Rate — The percentage of companies beating their earnings expectations.
  • The Guidance Spread — The difference between the percentage of companies raising guidance and those lowering guidance.

But when it comes to identifying individual stocks to buy, I’m convinced that we should also focus on these stats, specifically “earnings triple-plays” – companies reporting better than expected earnings, better than expected sales and raising future earnings guidance.

The reason couldn’t be more simple – decades of data shows that these companies outperform the overall market by the widest margin. And for prolonged periods of time, too.

It’s all thanks to a phenomenon known as “Post Earnings Announcement Drift'' or PEAD. Now I’m not going to get into the details and overwhelming proof today. You can read up on it in your spare time here.

Instead, what matters most is understanding the phenomenon is real, and therefore, instructive when it comes to selecting individual stocks in a tough market.

Again, the proof is in the data…

Up in a Down Market

The number crunchers over at Bespoke Investment Group track triple-plays each quarter. So far, there have been 105 and they’re doing precisely what they’ve done for decades — outperforming. Even in a tough market.

More specifically, the average triple play rallied 3.4% on the earnings report. While that’s down from the historical average of 4.9%, it’s still impressive. And it’s just the average.

Individual triple plays are responding much better, rallying as much as 31% in a single-day, as you can see below, courtesy of Bespoke.

(click image to enlarge)

If you dig into the data above a little more, you’ll see a preponderance of tech companies.

In fact, 13 out of the 30 top performing triple plays (or 43%) are in the Technology sector. That compares to the next highest concentration at 20% for the Industrials sector.

That’s not a surprise to this guy because…

  1. We’re living in the Era of Tech-Biquity.
  2. And tech companies historically report “beat rates” that are noticeably higher than the overall market.

Add it all up and if we want to put new money to work in this volatile market in the smartest way possible — with the highest probability of success over the long-term — we should focus on technology triple plays.

To make this strategy even safer, we can overlay some technical analysis and focus on technology triple plays that are also trading up year-to-date and above their 50–day moving average.

Guess what? Only two companies with a market capitalization above $2 billion meet such stringent criteria, which makes them candidates for the Trend Trader Pro “Trade of the Week.” Don’t miss out!



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Ahead of the tape,

Tags: buy stock-market