This time it is different.
This is a phrase usually used by an exuberant bull that wants to justify why he or she is right.
But this time – it actually is different.
You are not allowed to go to a restaurant. You are not allowed to go to a pub. You are barely even allowed out of your house.
So, what does this mean?
Well, first of all – it is an entirely novel experience for all of us.
Unlike our great grandparents/grandparents (or parents if you are getting on a bit) who could not leave the house due to German planes dropping bombs , our enemy is a silent killer.
If you have ever watched Contagion and wondered what it would be like to experience a pandemic – you are living it.
But how does this affect us as traders?
Unfortunately – and it is a sad reality – more people will die. Many more. There is not going to be a vaccine anytime soon, and when lockdown does eventually finish, it does not mean that we are all of a sudden going to be heading to beer gardens, restaurants, and cinemas.
Some people inevitably will, but the elderly and vulnerable will need to be careful.
With significant dents in earnings, it is my opinion that many stocks are still overvalued on this year’s metrics.
But stocks are forward-looking, and so what matters are next year’s metrics.
How the economy rebounds back from this will determine the valuation of stocks on next years’ earnings.
Businesses that are likely to see lasting problems such as Restaurant Group (LSE:RTN), Cineworld (LSE:CINE), or anything pubs or service facing, will continue to struggle. The best businesses to buy will be those that are relatively unaffected by the virus and can continue to operate remotely.
Several of those have announced updates with earnings ahead of expectations. It is worth making a note of these, and watching how the price action is responding.
I use SharePad to filter for stocks on a technical and fundamental basis, and I am now actively searching for stocks to buy for the next bull run. Doing the work now will result in outperformance over the long run.
I have several in mind – but have not taken any positions yet. The market may fall further, and if it does, I want to be in a position where I can load up cheap.
My criteria so far:
Debt must be manageable
Companies with debt are not necessarily bad, unless the debt the company has is a real problem to solvency if operations significantly decline.
A company leveraged with debt can take advantage of the tax shield, and boost EPS as shareholders are not diluted with equity – but this debt must be manageable.
Earnings must be growing
Any stock that I buy must be increasing its earnings. Stocks that are ex-growth are unappealing. With over 1,900 stocks on the London Stock Exchange – why buy any old junk?
This is the time to be picky. Do not pick a bad apple because you cannot be bothered to do the work.
The trend must be up
Stocks that are going up usually continue to go up. Stocks that are going down usually continue to go down. With this is mind – why would you buy a stock that is going down?
It makes no sense, and so any stock that I buy must be in a stage two uptrend already.
Abiding by these rules, I believe, will lead to me to find stocks that will outperform when the market bounces.
Author Michael Taylor’s website www.shiftingshares.com contains a number of tutorials on how to trade and invest as well as his free book – ‘How to Make Six Figures in Stocks’.