Hey, Robinhood traders: These ‘non-bubble’ stocks can also be good bets for you
Momentum trading is on everyone's lips, at least on Reddit boards and the Robinhood trading platform. But the principles of long-term investing haven't changed. If you follow a diversified strategy and stick with it, you will likely get good returns in the long run.
There are always people new to investing. And for trading. For those only thinking of price momentum or volatility, the lessons of long-term investing may seem boring, but they can also make you big bucks. Why not learn about a non-trading approach that has proven profitable over decades?
Three professional investors gave examples of long-term investments in interviews. These selections are based on analysis of financial health, growth prospects and the valuation of stocks against measurable values, as well as estimates such as earnings, sales and cash flow.
Trending trades and momentum risk
The recently escalated short squeeze, portrayed as setbacks by individuals against nefarious hedge funds, is an example of a momentum trading strategy that has worked well for traders in 2021. Some of the private mutual funds that had sold stocks short badly were hit hard. Melvin Capital reportedly fell 53% in January.
But the word is out. If you have shares in GameStop Corp. GME bought + 12.17% for $ 39.91 its closing price on Jan. 14 (even after it more than doubled from $ 18.84 about its closing price on Dec. 31) and held it through Jan. 29 concluded at $ 325 you would have been sitting nicely. But maybe less than if you sold them on the January 28th intraday high of $ 413.98.
But what if you got on the GameStop bandwagon late and bought the shares at the intraday all-time high of $ 483 on Jan. 28? You may have been angry on Tuesday morning (Feb.2) when shares opened at $ 140.76. At that point, you would have gone back 71% on your GameStop purchase. And that was before it dropped to $ 74.22. (They hit their all-time intraday low of $ 2.57 FYI on April 30, 2020.)
These hypothetical GameStop trades would have been based on nothing but sums. GameStop's business changed radically when it came to selling video game console systems and media to customers who might be better off buying the systems online and most likely never buying game media again as almost everything is downloaded these days.
A similar story could be told by traders playing American Entertainment Holdings Inc. AMC, + 22.66% short squeeze:
Fact set
Get on early and you can commit murder if you don't get too piggy. It helps to have a crystal ball. Be late and you could get impaled.
That's a huge risk - and possibly full-time work overseeing the wild speculation. And maybe sleep loss and worse consequences if you really screw it up.
How "long" money sees short-term action
Even if you have been successful with short term momentum trading strategies or gamble on the movement of the CBOE Volatility Index VIX, + 0.34%, It can be a good idea to invest part of your portfolio in stocks for long-term growth. Investing is not always trading. It means making a commitment (for years) to reducing risk and improving the rewards.
When asked for his thoughts on the short squeezes caused by traders communicating through Reddit's WallStreetBets messageboard, Saumen Chattopadhyay, chief investment officer of Carson Group in Chicago, said, “The timing of the market is dangerous. Time on the market is more important. "
Carson Group provides support to hundreds of investment advisory firms and also manages approximately $ 16 billion for its own clients, with Chattopadhyay managing approximately $ 500 million in a large-cap growth strategy.
He went on to describe the recent short squeeze and the evolution of the "playification of the market" during the coronavirus pandemic, which saw some people who were unable to gamble in casinos or restricted their sports games to trade online changed.
"We haven't seen this before - people driving the calls with stocks with no fundamentals," he said through the use of social media until recently.
Pointing out the information revolution, George Schultze, CEO of Schultze Asset Management in Rye Brook, NY, said it has become "ubiquitous" over the past 20 years and has led to "empowerment of the individual investor." While he admits that a lot of people are “very smart,” he continues to believe that investing is best left to professionals. Although he did not specifically address the short squeeze action, he said: "For people without knowledge, I would advise caution."
If your entire (and likely new) trading strategy is based on momentum and message boards, you may fall into the “ignorant” category.
John Buckingham, editor of the investment newsletter The Prudent Speculator, said democratizing investing through low-cost trading, the flow of information and social media wasn't a bad thing because "the little guys used to be the fools".
"If a hedge fund explodes, I won't cry for it," added Buckingham. "You took a risk."
The Prudent Speculator is published by the Kovitz Investment Group of Chicago. Kovitz manages around $ 6 billion, mostly for private clients but also through the Al Frank Fund VALUX, + 0.36%, which is rated four stars (out of five) by Morningstar.
Buckingham said that almost any diversified and "disciplined" approach to long-term investing in the stock market "should be successful".
He pointed to Viacom Inc. VIAC, + 0.42% - another stock that has been pushed up recently by traders who pushed back against short sellers. “Nobody wanted it for $ 10 and yesterday Everyone wanted it for $ 55, ”he said. "We didn't buy Viacom because we thought it would be subject to a short squeeze - we bought it because it was trading at single-digit P / E with a high dividend yield."
Buckingham said he sold some of his Viacom inventory on Jan. 27 "because it increased for no reason".
Stock selection
Schultze cited General Motors Co. GM, + 0.57%, as a solid long-term investment, despite the company's shares up 22% in 2020 and 56% since the close of trading on September 8, before opting for it used it in this story of investing in the electric vehicle industry beyond Tesla Inc. TSLA, -0.21% on September 9th.
" I'd rather have GM at $ 51 with no dividend than $ 15 with a 5% return. ”
“GM has reported good results and is holding up new partnerships with autonomous vehicle companies, ”he said, including this $ 2 billion deal with Cruise and Microsoft Corp. MSFT, -0.91%, announced on January 19th.
In October 2018, Buckingham said he was surprised at the market's disregard for GM. He was early, but liked the stock because of its very low valuation in terms of earnings estimates and its dividend yield of around 5% at the time.
GM suspended its dividend in April, but the market was obviously more impressed with the company's aggressive plans to launch 30 all-electric models by 2025 than the dividend cut.
Although he loves dividends, Buckingham said, “As investors, we don't mind if capital is shifted in creative ways. I'd rather have GM at $ 51 with no dividend than $ 15 with a 5% return. ”He continues to hold GM.
Speaking of Microsoft, it was one of three stocks Chattopadhyay recommended for long-term investors, including UnitedHealth Group Inc. UNH, -1.26% and FMC Corp. FMC, +1.39%.
He expects Microsoft's intelligent cloud segment revenue to grow at a cumulative annual rate of 16% over the next five years. He said data security is a major risk area for all major US tech companies, but he believes Microsoft is better protected from data breaches and political ramifications than Facebook Inc. FB because it has become a "staple". + 0.12% and Alphabet Inc. Demokratie, + 0.76%.
For UnitedHealth, Chattopadhyay sees a "goldilocks" political environment in which the Biden administration and Congress are much more focused on the economy, financial regulation, and "immigration resolution" than on a major change in the US health care system that the US Nation largest health insurance company could harm. He believes UnitedHealth sales can grow "robustly" over the next five years due to the positioning of the Optum healthcare services segment and Medicare Advantage businesses.
FMC makes insecticides and herbicides, as well as other agricultural products. Chattopadhyay said many of FMC's products are up to date and are designated by the EPA as "reduced risk pesticides" and that the introduction of newer products should drive "single digit growth for years". What makes it difficult to adopt is the variety of regulatory structures - and delays - around the world, he said.
Buckingham mentioned several other value stocks that he thinks are special bargains right now:
- The shares of Whirlpool Corp. WHR, + 0.31% closed at $ 212.40 on Jan. 28, but then fell 12% over the next three trading sessions, despite the company significantly beating analysts' estimates for sales and earnings. Buckingham called the company's results "fantastic" and said the negative market reaction was typical of the "buy-the-rumor / sell-the-news mentality today". WHR is trading at 9.3 times consensus earnings estimates for the next 12 months among analysts surveyed by FactSet. By comparison, the price / earnings ratio for the S&P 500 is 21.6.
- Goldman Sachs Group Inc. GS, + 2.80% is another example of a company that fizzled out the fourth quarter only to see its stocks fall afterwards. The stock lost 9% from its closing price on January 15th (before earnings were announced early on January 19th) to its closing price on February 1st. Goldman's price / earnings / earnings ratio is 9.3. If the US embarks on a sustained economic recovery from the pandemic, Buckingham expects the financial sector to "lead this year". He said "quality names with big dividends" in the sector include JP Morgan Chase & Co. JPM, +1.10%, Bank of America Corp. BAC, + 1.25%, Citigroup Inc. C, + 1.33%, and Capital One Financial Corp. COF, + 3.40%.
- Apple Inc. AAPL, -0.26% is a stock that might come as a surprise on a value list - it rose 68% for a year through Feb. 1 to keep individual stock positions (in a portfolio of around $ 80 Shares) grow too big, he has trimmed his position in Apple stocks for years after first buying them in 2000. But he still considers Apple a "buy" and said: "If you opened a managed account with us, you would get Apple. It would be your biggest stake today. ”Apple's stock trades at a forward P / E of 30.2.
Do not miss: Here are the biggest short squeeze on the exchange, including GameStop and AMC
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