Zacks Investment Ideas feature highlights: MGM Resorts International and Berkshire Hathaway
For Immediate Release
Chicago, IL – May 8, 2023 – Today, Zacks Investment Ideas feature highlights MGM Resorts International MGM and Berkshire Hathaway (BRK.B).
Anatomy of a Trade: 3 Considerations for Buying a Stock
There is no way around the fact that trading and investing is a challenging and complex endeavor. That doesn't mean buying stocks can't be made simple. Here are three critical variables to consider when making an investment.
What to buy: Which stock or other financial product are you investing in?
When to buy (or sell): What is your trade signal? Entry and exit.
How much to buy: What percentage of your portfolio are you allocating? How much risk?
What to Buy?
Before investors decide what to buy, they need to define what their investment universe is. All stocks? ETFs? Large-cap Stocks? Bonds? Commodities? Currencies?
Zacks makes it easy as we analyze most stocks and ETFs in the market and bring that information forward. The best way to utilize that information is through the Zacks Rank, where we publish the most compelling stocks based on analysts' earnings revisions, a proven methodology for predicting near-term returns.
The Zacks Rank #1 (Strong Buy) list is updated daily with compelling new stock picks. Today alone, nearly 30 new stocks were added.
Most investors aren't going to buy every new stock on the list, so the next step is to narrow down the variables. A conservative investor may focus on stocks above a certain market capitalization, say $10 billion. Or maybe they have conviction on a sector, or macroeconomic theme.
Let's say I am interested in gaming stocks. Most of the sector has recovered their pandemic losses but have yet to rally considerably from the pre-Covid levels. Gaming has been unloved and under owned, and I think they will soon rally again.
MGM Resorts International is a fresh addition to the Zacks Rank #1 rank, currently boasting a #1 Rank (Strong Buy), indicating upward trending earnings revisions.
When to Buy?
The next consideration for investors is when to buy. Getting upgraded to Zacks Rank #1 is certainly an effective buy signal. Zacks has proven over the years that upgraded stocks have strong near-term returns.
But what is another way to signal a buy? Some traders look at the chart for technical patterns. After the formation and breakout of a chart pattern, investors will then decide to buy a stock. Others may use fundamentals like valuation or sales growth as a buy signal. If a stock trades below some historical valuation, or if sales accelerate to a certain pace, it signals a buy.
Berkshire Hathaway for instance, is trading at an earnings multiple below the market average. This is a rare occurrence and is regularly followed by strong stock performance. Berkshire Hathaway also currently has a Zacks Rank #1. So, here we are aligning multiple buy signals.
Chart patterns more specifically can help investors design trade setups with a more granular perspective and allow them to define the risk-reward on a chart.
MGM Resorts International currently has a compelling technical chart pattern. MGM has been building a cup and handle breakout pattern over the last two years. The smaller consolidation labeled "handle" defines a tight consolidation for a trade setup.
If the price can trade above the $46 level, that would initiate a buy signal. However, if price trades below $42, the pattern would be invalid. This simple methodology allows us to easily define when we want to be in the stock and when we don't.
If MGM does break out, then investors need to define the stop out level and price target. There are several methods for doing this. For stops, some use a -10% trailing stop, while others use the breakout level, or the bottom of a range. For price target, investors can use a multiple of risk, say 2:1 risk reward.
If it is a fundamental thesis, investors may stay invested until a business metric changes, like an earnings miss, or a slowdown in growth.
I want to note that this is just an introduction to these ideas. Each of these factors can have whole books written on them.
How Much to Buy?
Risk management and position sizing is definitely the least covered topic of the three. However, it is without a doubt the most important. Picking stocks, and analyzing businesses and chart patterns is sexy, figuring out how much you might lose on a trade is not.
I want to make this clear, the amount of stock you decide to buy, as a percentage of your total portfolio, is the most important decision regarding an investment.
Like trading signals and stock picking, there are multiple ways to consider risk management. As a rule of thumb, when investing in a portfolio of stocks, individual stock positions should be between 1-10% of the total portfolio. More concentrated than 10% and you will be exposing yourself to considerable single stock risk.
It is also important to consider that most stocks are correlated with the market broadly. Diversification is another form of risk management. There is a saying that "50% of stock returns come from the market, 30% come from the sector, and just 20% come from the individual stock." If an investor holds 10 small cap oil stocks their whole portfolio is going to get hammered if oil prices fall. But, if they hold positions across sectors some positions may get hurt by a move in oil prices, but others may benefit.
Overview
Investors first need to decide what stock they are buying and why. Compelling research, an improving economy, an overlooked sector, a contrarian thesis or any other idea will do. Then they need to have a method for defining a buy and sell signal. Where do they get in and out.
Lastly, and most importantly, is risk management. How much money are they going to risk in the trade, and how big of a position does this call for, and what is the total portfolio risk.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.
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Berkshire Hathaway Inc. (BRK.B) : Free Stock Analysis Report
MGM Resorts International (MGM) : Free Stock Analysis Report
