Good Stocks: Value Stocks Usually Fall under this category

One would assume that individuals would be happy to invest in companies with solid fundamentals. One example among many companies is McCormick & Company, Incorporated (MKC). Business is Booming. In fact, they can’t keep up with demand, and yet, the stock is a laggard. It appears that market players want turbocharged results. They let their greed direct the companies they invest their money into. This phenomenon has always been present to some degree, but now it is being embraced hook, line and sinker. This story will have a horrible ending. But until that time, it also means that there will be some spectacular gains made by astute and disciplined investors. When this market eventually crashes, millions of paper multimillionaires will be reduced to dust. Only when these chaps lose it all will they realise the folly of their ways.

Higher quality stocks are trading at their largest valuation discount to the broad market since the dot com bubble of the early 2000s (see chart below), BlackRock CIO of US fundamental equities Tony DeSpirito said in a new research note. DeSpirito defines high-quality stocks as those of companies that generate profits and sport pricing power (so obviously, this excludes Special Purpose Acquisition Companies or SPACs). The companies manage their balance sheets and cash flows effectively, demonstrate strong accounting credibility and return capital to shareholders in a disciplined manner (most likely through dividends). Interestingly, despite the impressive fundamental features of high-quality companies, the stocks themselves have sucked wind going on for nine months.

DeSpirito’s research shows that quality stocks have underperformed since COVID-19 vaccine announcements came to the fore back in November 2020, sending their valuations lower. Instead of paying up to own quality companies amidst a global economic recovery (ones that could lift their dividends and share repurchase plans because of the macro rebound), investors have largely avoided or sold these stocks in favour of riskier bets that produced strong gains early in the recovery. https://cutt.ly/zn5qLF3

Good Stocks Buying Strategy

View volatility through a bullish lens as long as the trend is up. We are fast reaching the point where 4500-point pullbacks in the Dow will have to be viewed as minor aberrations. Once upon a time, anyone making such a statement would be considered to be a nut case.

Secondly and more importantly, only get into stocks you like. Why is this important? Because you don’t want to sit up at night asking yourself, oh, why the hell did I buy this crap the moment you start to feel some pain. In other words, don’t base your stock purchases on some silly expert like Cathie Wood or anyone else that is hyping a stock it does not fall under the good stocks category. If that is the only reason you are jumping into an investment, don’t cry when you notice you are missing a finger or two. Buying a stock based on hype is the same thing as chasing a stock. The outcome is almost always unpleasant. And at the Tactical Investor, we never ever chase a stock. There will never be an exception to this rule. Perhaps one exception, if they came out with a stupidity index that we could invest in. We would alter our views, for stupidity has been in a perpetual bull market.

One needs to understand that there will be times when some of your holdings will be down by 30% or more. But as we never deploy all our funds in one shot, if we are down 30%, we will view it as an opportunity to purchase even more shares. We have utilised this strategy very successfully over the years. The last time we actively put this strategy into play was during the COVID crash.

No market trends upwards in a straight line and the vast majority of today’s market participants are mindless momentum players. They use apps that gamify the experience. The gamification factor makes it all seem cool and fun, and yes, initially, it is fun. It will create a lot of paper millionaires, but very few will cash out in time. Greed knows no limits. When people who don’t know what they are doing think they know what they are doing, a whole world of pain waits for them. In the interim, these participants will drive volatility levels higher, which is why we are providing an advance warning that 4500-point pullbacks should be viewed as a non-event. Many traders will mistake these pullbacks for crashes and short the markets, and lose a fortune in the process.

It is pretty interesting to see so many individuals in the neutral camp. With the market surging to new highs, bullish sentiment should be north of 50, and Neutral readings should be below 25.00. This illustrates just how completely out of whack things are in the market today. The only thing that will provide the average player with an edge is Mass Psychology. One day there will be stories written about those morons chasing meme stocks and the Reddit groups that thought they were changing the landscape, but in the end, 90% of them will bite the dust. For the record, one of the reasons the SEC is not doing much about these Reddit Groups is because they are inadvertently helping speed up the demise of the Hedge fund industry. We stated a few years ago that the financial sector would be in for a world of hurt. Eventually, every industry that tried to squeeze their customers will face a severe backlash.

We will be cutting stocks from our pending plays lists faster due to the trend changes discussed above.