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How investors should pick stocks to beat a go-nowhere market

·Lawrence Lewitinn

It’s been a sideways market since the end of QE, so investors need to sharpen their stock-picking skills rather than hope to ride a rising tide.

The S&P 500 (^GSPC) is currently trading where it was when the Federal Reserve ended its bond-buying quantitative easing program in November 2014. That’s even after hitting a record high last year and suffering a few subsequent stumbles.

Those who bought the index a year and a half ago have received the benefit of dividends but not much in the way of price appreciation as they did in previous years. For example, in the 12 months prior to the Fed’s last month of quantitative easing, the S&P 500 gained 13%.

Investors often hope to see gains from dividend payments and price increases. It’s often tempting to pick stocks with high forward dividend yields and anticipated future price increases. However, it’s not so simple, warns Brian Barnier, principal at ValueBridge Advisors and founder of FedDashboard.com. He notes that estimates for both dividends and price appreciations aren’t steady.

“It's more complicated because we're still living in the wake of the Fed asset bubble, the credit bubble crash, and, believe it or not, the tech bubble crash,” he said.

Investors also pick equities based on whether they are value- or growth-driven stocks. But that, too, may not necessary be an easy task.

“If you look at a fund and you read the disclosures, these definitions are all kind of funny,” said Barnier. “Value means different things to different people.”

He points out that two of Vanguard’s funds, one with growth stocks (VWUSX) and another with value stocks (VUVLX), have moved by just about the same amount since 2009.

“These are supposed to be different,” Barnier said. “But it turns out they're not, especially in times of quantitative easing where they track very closely together. Across almost two decades, we see both of these popular funds coming in about 145% growth even with two virtually identical resets.”

And rather than picking whole sectors, Barnier suggests investors look for specific fundamental drivers. He uses a “flag chart” which ranks data points in a sector from worst to first, in this case, five-year sales growth for companies in the S&P 500, color-coded according to individual sector. For example, Facebook’s (FB) 51% sales growth is the highest in the information technology sector while Motorola Solution’s (MSI) 12% decline is the lowest.

5-year sales change for S&P 500 companies

Sector

Top

Bottom

Consumer Discretionary

Michael Kors (KORS)

46%

Best Buy (BBY)

-6%

Consumer Staples

Constellation Brands (STZ)

23%

Mondelez (MDLZ)

-13%

Energy

Range Resources (RRC)

25%

Murphy Oil (MUR)

-41%

Financials

Leucadia National (LUK)

64%

Regions Financial (RF)

-8%

Health Care

Regeneron (REGN)

67%

Abbott Labs (ABT)

-16%

Industrials

United Rentals (URI)

25%

Tyco (TYC)

-14%

Information Technology

Facebook (FB)

51%

Motorola Solutions (MSI)

-12%

Materials

Ecolab (ECL)

23%

Newmont Mining (NEM)

-8%

Telecom

Level 3 (LVLT)

16%

Frontier (FTR)

1%

Utilities

AGL Resources (GAS)

22%

Ameren (AEE)

-6%

S&P 500 Average

 

6%

 

 

Source: Zack Investment Research

 

 

 

“Once you've got the data analytics, look at individual companies,” said Barnier. “Do something different… This is getting us closer to a good answer. So investors, don't just buy industries, but you can take some good nuggets out of [them].”

Barnier also says investors should look for steady earnings when making long-term picks. While economically sensitive cyclical stocks may have doubled in the past two decades, those with reliable earnings have far outperformed. The Zacks Earnings Certain Proxy, which consists of stable companies with consistent earnings while excluding interest-rate sensitive and hyper-growth stocks, has seen a 1,400% return in the last 20 years.

“In a world of data analytics, in a world of our crazy fundamentals, it means you've got to look down into the individual [companies] and pick the right [stocks] using the tools that are available,” said Barnier.