Before You Put Any New Money Into The Market, Read This...
Longtime readers know that I make it my business to identify "the next big thing." This can come in the form of a product, service, technology or a company that materially disrupts the baseline assumptions for doing business in a particular industry.
In my premium newsletter, Game-Changing Stocks , I usually focus on a big idea and give readers my take on stocks that could deliver triple-digit gains for investors. I also recommend allocating about 20% of your portfolio to these kinds of picks in order to really juice your portfolio while compounding the other 80% of your money in "autopilot" mode through safe, stable index funds or blue-chip stocks.
But lately I've been making the case that the market is too overvalued and volatile for anything but the most tactical of new investment dollars. Until things return to normal, it's the prudent thing to do right now.
So recently, I had a reader ask me this:
Andy, if I'm sidelining new S&P 500 allocations, is there anything I should invest in in the meantime? If the S&P 500 is a no-go for a while, do you have any suggestions that meet YOUR criteria for a good 80% "Autopilot" stock?
It was a great question that gives me a lot of confidence in my subscribers. They know not to expect a steady stream of triple-digit gains year-round.
Now I believe in teaching a man to fish is far more valuable than simply feeding him. So before I answered this reader's question with a pick, I laid out specific criteria for finding prudent investments in this market environment. I'd like to share them with you today.
How To Find Great Investments In A Troubled Market
1. Look for stocks with a market cap in excess of $10 billion.
These companies tend to be stable and less volatile. They tend to have mature business models, viable brands and an established customer base.
2. Locate any companies with an institutional investment of greater than 75%.
This is a metric reported on most financial news sites. It's a good gauge of the degree to which the "smart money" -- institutions, insurance companies, banks, pension funds, etc. -- is investing in a given company. This is "Being Right" insurance. If you've bet on a company that has major institutional ownership, you can bet that its analysts have done more modeling, research and other due diligence than you have.
3. Find a price at the lower end of the 52-week range.
Picking up stocks close to the bottom is a nice feeling. And, interestingly, it seems like when the overall market gets a little overheated, there are a couple of dozen of these companies available.
Sometimes there is a good reason why they're trading cheaply. Sometimes there isn't. And sometimes there is something that looks like a good reason but is really an obstacle the company can surmount.
As a general rule, don't buy stocks for your "autopilot" portion of your portfolio that are in the top quarter of their 52-week range. In this market, there's probably not enough upside.
4. Try to find a reliable increase over time in the shareholder equity line on the balance sheet, or a fairly rich return on that equity (of, say, 20%).
Most investors are scared of balance sheets. But I promise this one's easy -- it's just one line called shareholder equity. That is the part of the company, in dollars, that would remain if all assets were disposed and all debt was paid.
This should rise over time. If it doesn't rise, then all is not lost. All we have to do is grab the net income line from the income statement -- it's at the bottom -- and then divide it into the shareholder equity line. Sounds hairy. It isn't.
5. While you're looking at the balance sheet already, go ahead and jot down the total assets and total liabilities.
I like to see total assets outpace liabilities by at least a factor of 2. If there is $2.5 billion in debt, I'd like to see $5 billion in assets. (And, ideally, I'd like for as little of that to be on the Goodwill or Intangibles lines as possible.) Doing this will lead you to companies that have the financial wherewithal to stay the course during rough times.
A Pick For Your 80% 'Autopilot' Portfolio
A great company that fits most of these criteria is Cummins (NYSE: CMI ) .
Cummins makes diesel engines -- good ones. They can be found in everything from Dodge trucks to heavier equipment in the manufacturing, transportation and agriculture industries.
Cummins fares well based on the criteria I just gave you. It's a great company with an outstanding product and loyal customers. But its stock is lagging in the doldrums lately.
To be sure, there are a number of reasons for this, but I simply don't have the space to get into them in today's essay. Suffice it to say, I think they can be overcome (I shared a lot more about this with Game-Changing Stocks readers in a recent issue).
I'd feel confident adding CMI with an eye on selling in the $140-$150 range. That would give investors a 55%-plus gain from current levels.
Bottom line: You don't always have to search high and low to find an investment with outstanding return potential -- even in this market. Simply follow the criteria I laid out and do your homework.
P.S. Finding potential big winners like CMI is something I've become known for around the StreetAuthority office. That's why every year I release a new financial briefing I call the 10 Shocking Predictions for the coming year. This year's list includes the new wearable technology that could crush sales of the Apple Watch... Google's stunning new move into the real estate industry... and even how a little-known company could take over the banking industry and deliver triple digit returns for early investors.
Get all the details on these highly profitable opportunities -- complete with a dozen under-the-radar stocks that could soar 100% or more -- in 10 Shocking Predictions for 2016 . See it here .
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