Markets

The Secret Behind the High-Fliers

Solid fundamental strength doesn’t always lead to big gains fast … here’s the missing ingredient

Yesterday’s Digest began a two-part series featuring market legend, Louis Navellier, and his  system.

We’re doing this because, today, Louis is releasing two brand-new stocks to join his portfolio. These are companies with top-notch earnings quality which, if Louis’ track record is any guide, are likely to make big returns for subscribers. So, as a courtesy to all our Digest readers, we wanted to make sure you were aware of it first.

Just as important, we’re walking readers through Louis’ Accelerated Profits system, since its screening criteria can help make you a wiser investor — especially in today’s market environment.

You see, even though the market is still hovering around highs, it’s changing. We’re on pace to see an earnings-decline of 2.3% this quarter — the first decline in almost three years.

Here’s Louis on what this means for the market:

… not all stocks will thrive in this environment. The stock market will narrow, as institutional investors chase fewer stocks. Essentially, the stock market will act like a funnel and divert funds to stocks that will continue to prosper in a decelerating earnings environment.

***This means a strict focus on high-quality earnings and other fundamental factors is more important than ever

Yesterday we detailed these factors: Earnings Growth, Earnings Momentum, Earnings Surprises, Analyst Earnings Revisions, Sales Growth, Operating Margins, Return on Equity, and Cash Flows.

We then pointed toward real market gains that have resulted from Louis’ system when using this screening criteria: 1,125% from Hansen Natural … 457% from Holly Corp … 430% from NVIDIA … and 477% from EMC Corp, among others.

Last, we recapped the strategy tweak which Louis stumbled upon ten years ago, which resulted in big, short-term stock gains.

It’s was a way to make large profits, not over “years” of growth, like Louis was accustomed to … but through compressed periods of hypergrowth in the share price.

And that leads us to today’s second installment …

***So, what was this missing ingredient which Louis discovered that sped up the timing to hit these big returns?

It relates to how “in demand” a stock is on Wall Street. I’ll let Louis take it from here:

Market analysts like to say that a stock in great demand among money managers is “under accumulation.”

Think of it like this: Our proprietary system can “x-ray” the market and see stocks that are under heavy buying pressure, or accumulation … just like the unseen pressure building in an underground hot spring.

Now, we want to make this Digest as valuable for you as possible. So, even though Louis’ system does involve a proprietary system, I want to dig deeper to help you understand the principles that play into that system.

Back to Louis:

Let’s start with a key financial concept: alpha.

Alpha measures the performance of an investment against a market benchmark like the S&P 500. The investment’s return relative to the benchmark’s return is the investment’s “alpha.”

Alpha is quoted as a number. For example, if the S&P 500 rises 10% in a given year and a stock rises 12% during that same time, the stock has an alpha of 2 …

Our proprietary system scans the market for stocks with alpha. We find stocks that tend to rise more than the market. But we don’t stop there. To base my recommendations only on alpha is far too risky, and I see no need to take on that extra risk.

Our research has shown that some extraordinary stocks beat the broad market while at the same time are LESS volatile than the broad market. These extraordinary stocks are things of beauty because they offer bigger returns, but with less volatility.

We rank stocks according to a combination of alpha and volatility. Those stocks that are going up the most with the least volatility are ranked the highest.

***Just how big of returns are we talking about for the highest-ranking stocks?

As one example, in August 2013, China Distance Education (a China-based provider of online education), began sporting incredible fundamental ratings along with strong institutional buying pressure ratings.

Louis recommended the stock just before that buying pressure ran it up 105% in about four months.

 

As another example, there was the Chinese online car shopping firm Bitauto. Louis recommended it to subscribers in June 2013. It raced 209% higher in about eight months.

 

As one final example, there was online retailer Vipshop. Louis recommended it to subscribers in April 2013, then watched it soar 487% in just under a year.

 

Louis describes the dynamics that are behind these fantastic, short-term gains:

When an elite stock with incredible fundamentals and strong buying pressure reports earnings, it tends to create a “geyser” event … where the stock makes a large price advance in a short amount of time. An earnings report often acts as the “catalyst” that draws in more buyers and sets off big price runs.

Keep in mind, the broad market’s long-term (inflation-adjusted) return is around 7% per year. At that rate, it will take you about 10 years to double your money.

But as we’ve just seen, a high-quality growth stock in “geyser” phase can double your money in six months.

I’m looking at Louis’ open Accelerated Profits “Ultimate Growth Trades” portfolio as I write this, and am seeing a gain of 146%, a second at 155%, and another at 140%. A great many additional gains of 50%+ litter the portfolio.

***So, as we wrap up, let’s first focus on the educational takeaway

If you’re looking to mimic Louis’ Accelerated Profits approach, it means you need to start with a focus on fundamental strength. Again, those criteria are: Earnings Growth, Earnings Momentum, Earnings Surprises, Analyst Earnings Revisions, Sales Growth, Operating Margins, Return on Equity, and Cash Flows.

The need for strong, organic earnings growth can’t be overemphasized. As Louis says:

Earnings drive stock prices. The reason these stocks can deliver such large returns in short time frames is because they have such strongest earnings growth.

Next, to shorten your hold time before hitting the big gains, you need to turn your attention to those stocks offering a combination of outsized alpha with reduced volatility. Together, these variables affect how “in demand” the stock is from Wall Street. And it’s often this increased, institutional buying pressure that leads to those huge, short-term returns.

This is just Jeff talking now since Louis’ system is proprietary, but as part of this, I’d also look at a stock’s volume to help get an indication of where this buying pressure is coming in. Repeated days of greater-than-average volume as a stock price is climbing could be a signal of an impending pop.

Of course, all this analysis takes time. Plus, the more experience, the better. Given this, if you want help in identifying stocks that are on the verge of hitting a “geyser” phase, Louis is coming out with two new picks today. You can learn more by . With market conditions growing more challenging, this video could be very important for your stock selection going forward.

As we finish, I’d like to give Louis the final word:

Uncovering the “creme de la creme” — the stocks with elite fundamentals that generate massive short-term gains — I’ve been telling you about is one of the most exciting and significant events in my career.

Their ability to generate big returns without big volatility never ceases to amaze me. Their ability to generate returns in weak markets never ceases to amaze me, too. In 2001, 2002, and 2003, this approach did very well, despite the broad market’s weakness.

 

And since then, these stocks have performed 83.3% better than the broad market, on average. When applied consistently over time, that’s an edge that can add an extra zero to your net worth.

Have a good evening,

Jeff Remsburg

The post appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Latest Markets Videos