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How investors should pick stocks to beat a go-nowhere market

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Since the end of QE, the market has been sidelong. Therefore,  investors have to refine their stock-picking skills instead of hoping to ride a rising tide.

The S&P 500 is currently trading where it was when the Federal Reserve finished its bond-buying quantitative easing program in November 2014, even after reaching a record last year and suffering a few continuous mistakes.

Investors that bought the index a year and a half ago got the benefit of dividends but not much in the way of price appreciation, comparing to the previous years. During the 12 months before the Fed’s last month of quantitative easing, the S&P 500 gained 13%.

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Investors want to see gains from dividend payments and price increases. Stocks with high forward dividend yields and anticipated future price increases always look attractive. Brian Barnier, principal at ValueBridge Advisors and founder of FedDashboard.com, notes that estimates for both dividends and price appreciations are not stable.

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Investors also pick equities based on whether they are value- or growth-driven stocks. But that, too, may not necessary be an easy task and turn out to be tricky.

Instead of picking whole sectors, Barnier suggest the investors to search for specific fundamental drivers. He uses a “flag chart”, which ranks data points in a sector from worst to first. In the below table,  there is five-year sales growth for companies in the S&P 500, color-coded according to individual sector. For example, Facebook’s (FB) 51% sales growth is the highest in the information technology sector while Motorola Solution’s (MSI) 12% decline is the lowest.

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Barnier suggests to take a look at the individual companies, after analyzing the data. “Do something different… This is getting us closer to a good answer. So investors, don't just buy industries, but you can take some good nuggets out of them.”

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He says that investors should look for stable profit when making long-term picks. While economically sensitive cyclical stocks may have doubled in the past 20 years, those with stable earnings have far outperformed. The Zacks Earnings Certain Proxy, which consists of stable companies with consistent earnings while excluding interest-rate sensitive and hyper-growth stocks, has seen a 1,400% return during past two decades.

Barnier mentions"We live in a world of data analytics and crazy fundamentals, therefore, investors have to take a look at the individual companies and choose right stocks, while using the available instruments".

 

 

 


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