Timing the market, or trying to guess which way the market will move is an activity fraught with challenges. Most of us have at some point made the mistake of waiting too long for prices to fall before committing our money. So we’ve found ourselves missing the bottom. Or conversely, we kept buying into a bull market only to have our profits shaved off in the event of an unexpected correction.
These are common “mistakes,” if you can call them that. But you will have the bandwidth for these kinds of mistakes if you’re trading with only a small percentage of your total holdings, say 10-15%. The most significant part, about 80-85% should be invested in long-term value stocks that continue to appreciate over time. That’s what will get you through tough times and new or unforeseen expenditures.
So when I’m talking about anything that sounds like timing the market, I’m assuming that you’re not going to put all your eggs in the one basket. I’m assuming that this is money that you can spare. Once we’re clear on that, we can get into the details on how you can minimize the risk and maximize the gains from such an investment.
The last few months have seen some notable trends that benefited some sectors while hitting others. Some of these trends are longer-term shifts in people’s behavior and some are shorter-lived, likely to change as we attain a greater degree of normalcy.
So for example, when the company we work for makes a work-from-home policy change, there’s a commitment of funds to facilitate the change that ensures that the trend will last. As more companies go this route, it kicks off demand for other tools and apps that are relied on when the workforce is largely operating from home. There’s also an impact on real estate allocation, as demand for office space falls while that for larger homes goes up. All this works out to be a mega trend.
Included in this group however are smaller trends that may not be part of the bigger trend. Netflix for instance could see a sharp increase in subscriptions in the early days of the lockdown, but of course, the trend wasn’t sustained for the second half of the year, as growth rates dropped back off with many people going back to work, the novelty of the pandemic wearing off and the need for livelihood coming to the fore.
There’s also another category however, one that comprises stocks that have been relatively resilient to the pandemic, as far as demand is concerned. These companies would typically see pent-up demand for necessary goods or services that customers merely postponed but couldn’t cancel when the pandemic scared them indoors.
When picking a stock that could be a play on these trends, it makes sense to choose only those stocks that have a Zacks Rank #1 (Strong Buy). That’s because strong buy-ranked stocks have historically outperformed the rest of the market and have a greater chance of appreciating in the near term.
If they also belong in one of the top-ranked industries (the top 50% of Zacks-ranked industries outperform the bottom 50% by a factor of 2 to 1), that’s a bonus. Around half of a stock’s appreciation is attributable to the industry it’s in. Also look for a Value-Growth-Momentum (VGM) Score of A or B because these scores represent condense different factors into a single unit for quick appraisal. And an A or B means there are many good reasons to invest in the shares. If you still feel unsure, take a look at the long-term growth estimate. A decent LTG is a good indicator of growth prospects beyond the pandemic.
Also take a look at the price chart because that too tells a story. Stocks that continue to reach higher highs and higher lows are likely to continue the trend.
Let’s look at a few examples-
Patterson Companies, Inc. PDCO
After divesting its medical business, this company is now the leading distributor of dental and animal health products. Its dental customers include dentists, dental laboratories, institutions and other healthcare professionals. Animal products are targeted at pets, horses, beef and dairy cattle, poultry and pigs.
Neither of the two markets the company caters to is likely to take a lasting blow from the pandemic. As a result, PDCO has seen year-over-year earnings growth in every quarter of this year. While things did slow down in the September quarter, this may be attributable to seasonality, especially because results were still higher than in 2019.
PDCO is expected to grow revenue and earnings both this year and in 2021. It has topped estimates in each of the last four quarters at an average rate of 73.9%.
Its long-term growth rate is 9.10%.
The shares jumped 15.98% in the past week, 22.75% over the last month and 30.42% in the last three months. But the price chart indicates further upside. Take a look-
Ultra Clean Holdings, Inc. UCTT
The company is a developer and supplier of critical subsystems for the semiconductor capital equipment, flat panel, solar and medical device industries.
Semiconductors are part of the building blocks behind the entire digital revolution that was already in progress and accelerated by the pandemic. What’s more, semiconductors are also behind things like artificial intelligence, self-driving cars, smart cities, 5G and many other innovations. So a company providing equipment for their manufacture should see continued growth.
UCTT is expected to grow revenue and earnings both this year and in 2021. It has topped estimates in each of the last four quarters at an average rate of 34.9%.
Its long-term growth rate is 8.00%.
The shares jumped 10.19% in the past week, 38.30% over the last month and 72.79% in the last three months. But the shares continue to trade below their median P/E over the past year. Take a look at the price chart-
Strattec Security Corp. STRT
Strattec Security designs, develops, manufactures and markets mechanical locks, electro-mechanical locks, keys and related products for cars and trucks in the U.S., Canada and Mexico.
The auto OEM industry that the company is a part of has been a beneficiary of the pandemic because of the social distancing imposed on a society that needs and wants to get out of the house, even if it isn’t to faraway places that will require the use of public transport like airplanes and cruise ships.
STRT is expected to grow revenue and earnings both this year and in 2021. It has topped estimates in two of the last four quarters at an average rate of 280.6%.
Its long-term growth rate is 15.00%.
The shares jumped 20.99% in the past week, 54.27% over the last month and 166.59% in the last three months. But the shares continue to trade below their median P/E over the past year. Here’s the price chart-
5 Stocks Set to Double
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Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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Ultra Clean Holdings, Inc. (UCTT) : Free Stock Analysis Report
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