Category: Market Insights

All stock charts in this post are powered by MarketSmith and I am an IBD Partner.

I ran a MarketSmith screen to see how many stocks priced above $5 and trading at least 100k shares a day, doubled year-to-date. The result: 78.

One can easily assume that most of those stocks probably belong to very profitable companies. I applied an earnings quality filter. It turns out that only 6 out of the 78 stocks are in the top 20% in earnings quality. This should challenge the common-held belief that earnings growth is the driving force behind strong price performance. The market is a lot more nuanced and complicated in a one to twelve months perspective. Expectations for future price gains drive demand and supply in the short-term and nothing impacts those expectations more than recent price action. Price momentum continues to be one of the least understood and most powerful characteristics behind many of the best-performing stocks every single year.

All stock charts in this post are powered by MarketSmith.

Kylie Jenner might be the youngest self-made billionaire in the history of the world. She is not even 21 but she has managed to leverage her social media following and Internet tools like Shopify to build a highly profitable business. She sells makeup. Her company Kylie Cosmetics has generated more than $600 million since its launch two years ago. Forbes has an interesting overview of her business.

What interests us more as investors is how we can participate in this high-margin, high-growth makeup business? There are several cosmetic plays available to public investors – ULTA, ELF, AVP, LVMUY (which owns Sephora).

The price action in ULTA is the only one that is catching my attention at this point. After going from $5 per share in 2009 to $300 in 2017, ULTA has pulled back about 20% and it might be setting up again.

ULTA is not just a pure momentum play. No long-term trend can survive on just rising market expectations. Long-term price appreciation requires serious earnings growth. And ULTA has the numbers. ULTA had earnings per share of 1.90 in 2012. This year, it is expected to make 8.40. In 2020, it is anticipated to gain close to $13 per share. It is currently trading at about 20X its 2020 expected earnings, which is a reasonable valuation for a company that grows 30% per year.

ULTA is working on a new base and it needs some time to set up properly. A breakout above $260 might trigger another momentum move higher. I don’t own any shares of it at the moment.

Charts in this post are powered by MarketSmith.

GE has just lost its spot on the Dow 30. Walgreens will replace it. This should not come as a big surprise. Its stock has been in a disarray for quite some time. It is down about 60% for the past 18 months.

You would not believe how many people told me they were buying GE at 25, 20, 18, and 15 because “it has become very cheap and it will come eventually back”. Maybe, it will recover to all-time highs one day. Maybe, it will take many years to do so and you will get tired of waiting.

Not all individual stocks recover from a big drawdown. Many remain dead money for decades to come. There is a big difference between individual stocks and stock indexes.

Indexes usually come back because they are diversified and they cut the losers (remove stocks which market cap has fallen below a threshold level) and add potential winners (add stocks which market cap has risen above certain threshold level). The current minimum threshold for the S&P 500 is $6.1 Billion.

The most popular stock indexes in the U.S. are basically long-term trend following systems in disguise. I sometimes joke with passive investors (indexers) that they are actually trend followers who don’t want to pick stocks.

Buying 52-week lows in a bear market is understandable if you are a value investor. Most stocks take a big hit during market corrections and the good is thrown out with the bad.

Buying stocks making 52-week lows in a raging bull market is a completely different story and it often doesn’t end well. If a stock keeps plunging while the rest of the market is advancing there’s is usually something very wrong with it and it is likely to continue lower. You can save yourself a lof headaches if you ignore the 52-week low list during bull markets.

Most people will be better off waiting for a beaten-up stock to build a new base and break out to new 52-week highs before they enter. A new 52-week high in a crushed stock might still mean 50% below its all-time highs.

When you buy a new 52-week high in a heavily neglected stock, you achieve two things: you have momentum on your side and you have plenty of people who don’t believe in the stock, which is good because those same people are a future source of demand.