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Navigating the Stock Market: Picking Winning Stocks

3 Mins read

The stock market is a diverse playing field with winners and losers, each subject to various factors such as company performance, economic conditions, and more. For investors, the challenge lies in identifying the winners amidst this dynamic environment.

Timing plays a significant role in this pursuit, as it can greatly impact investment outcomes. Last fall witnessed a remarkable uptick in most stocks, with the S&P 500 surging 25% since then. While Big Tech dominated headlines, other lesser-known names also experienced favorable gains. An excellent example is the Invesco S&P 500 Equal Weight Exchange-Traded Fund (RSP), which equally weighs each stock in the index and has delivered a solid 20% increase.

The driving force behind this market surge was the expectation of the Federal Reserve ceasing interest rate hikes as inflation subsided. A halt in rate increases signifies a stable economy and, more significantly, steady corporate profits for investors to rely on.

Let’s reflect on how this played out back in early October: the optimism surrounding the economy propelled all stocks, generating what is known as positive correlation. According to the Cboe Options Exchange, correlation levels stood at 50% by the end of the year.

However, as time progresses, the market has factored in this optimism, resulting in fewer stocks experiencing upward momentum. In just three months, correlation levels have plummeted below 20%, nearing the lowest point witnessed in over a decade.

In this current landscape, it is the companies effectively executing their strategies that garner success. Julian Emanuel, strategist at Evercore, perfectly encapsulates the nature of the market, stating that it is truly a “market of stocks” rather than a mere “stock market.”

Unfortunately, some companies have been unfairly impacted by recent events. The failures of certain banks during the spring had detrimental effects on all regional bank stocks, leading to a 25% decline in the SPDR S&P Regional Banking Exchange-Traded Fund (KRE).

Now, the fundamental question emerges: which stocks present valuable buying opportunities?

Undeniably, some stocks have been unjustifiably undervalued. Regional bank stocks, in particular, have suffered setbacks due to the mentioned spring bank failures. Consequently, the SPDR S&P Regional Banking Exchange-Traded Fund (KRE) has experienced a 25% decline.

In conclusion, successfully navigating the stock market requires astute decision-making and awareness of market dynamics. By understanding the interplay between economic indicators, company performance, and timing, investors can identify promising stocks and position themselves for long-term growth.

Finding Opportunities in Challenging Times

In the current market, not all financial institutions have seen a decline in their fundamentals. One prime example is Bread Financial (BFH), which has a market capitalization of $1.7 billion. While the company has experienced an 8% decrease this year and even reached double-digit losses at one point, it now trades at only 3.2 times forward earnings-per-share forecasts. This is significantly lower than the five-year average of nearly 6 times, according to FactSet. Analysts have even revised their EPS estimates higher, highlighting the stability of deposits for Bread Financial.

Similarly, the consumer staples sector has an interesting narrative. In the past year, investors were attracted to the safety offered by companies selling essential items such as groceries and toilet paper. Consequently, these stocks witnessed considerable growth. However, the Vanguard Consumer Staples Index Fund Exchange-Traded Fund (VDC) has recently underperformed the S&P 500, prompting investors to explore new opportunities.

That being said, there are exceptions within the consumer staples sector as well. Coca-Cola (KO) is one such exception, currently experiencing a 7% decrease from its December high. Despite this downturn, Coca-Cola trades at approximately 22 times earnings, representing a 16% premium to the S&P 500’s price-to-earnings ratio of 19 times. Historically, Coca-Cola has traded at even higher premiums when staples are in greater favor. With analysts predicting an annualized EPS growth of 7% over the next three years and plans to increase its dividend payment by approximately 5.5% annually, Coca-Cola has the potential to generate a solid total return.

Another player executing a high-growth strategy in the consumer staples sector is Starbucks (SBUX). By expanding its presence in China and gaining new rewards members domestically, Starbucks aims to achieve increased sales and expanded profit margins. Currently, the stock is down 11% from its peak in April but trades at a reasonable 25 times earnings. This represents a 33% premium to the S&P 500’s multiple, although it has been known to trade at an even greater than 60% premium. With an expected earnings growth rate double that of the S&P 500 over the next three years and a track record of surpassing EPS expectations in three out of the last four quarters, Starbucks has the potential to climb higher.

So, in this challenging market landscape, how can we identify the winners? The key lies in finding sturdy businesses that are available at reasonable prices. A useful strategy is to observe which stocks investors are selling and the reasons behind their actions. By examining this information, one can uncover hidden gems amidst the chaos, ultimately leading to profitable investment opportunities.

Contact Jacob Sonenshine

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