Tags: stock | picker | market | investors | gold

It's Always a Stock Picker's Market

It's Always a Stock Picker's Market
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By    |   Friday, 13 April 2018 05:53 PM

Up, down, sideways. It doesn’t matter what the overall stock market does. What does matter is the fact that many individual names will do something completely different. That’s what creates buying opportunities—especially opportunities that have the potential to beat the broad market over time.

Most investors take the market as-is. They do so by buying an index fund. Rather than try to pick individual stocks, they look to just buy the entire market.

There are some advantages to doing that. Most individual investors don’t have the chops to invest. They either wait to buy until a value is gone, or they panic at the first sign of what turns out to be imagined trouble. Most individual investors perform so far below the market that just getting the near-market return of index investing is a huge step up.

But when you’re buying the index, it means you’re always happy buying stocks. It doesn’t matter if the economy is about to hit a recession or if stocks are trading at historically high prices relative to sales or earnings (like they are today).

In a world completely dominated by index trading—also known as passive investing—there are still plenty of opportunities for investors to profit by buying into individual names in the market. More importantly, market indices are usually weighted by a company’s market cap.

So if you’re investing in the broad market, you have a lot of money already in the big-cap tech names that dominate stocks. While those are some great, industry-leading companies, the fact that they’re widely held means that getting a bargain in a large-cap name is becoming increasingly difficult.

That’s why investors looking for market-beating results should look to smaller companies. Any firm outside the S&P 500 likely has zero to near-zero weighting in most market indexes that investors clamor for today. It’s where investors can still find companies trading at attractive valuations, and still get growth. Investors looking for “the next big company” won’t find it in an already big company.

But besides looking for small companies, finding sectors that are out of favor is crucial to getting a good value as well. Markets are cyclical, and what’s out of favor now will likely come back into favor later.

Finally, for investors willing to increase their activity behind a passive buy and hold, there are plenty of ways to take advantage of today’s increasingly volatile markets.

One such way is trade some of the most volatile stocks out there. It’s not for everyone—a bigger potential reward does entail bigger risks and the need to manage effectively. But done right, you can start improving your overall portfolio returns in today’s up-again, down-again markets by buying small cap, out of favor companies on a big down day, then selling them on an up day.

There are plenty of places where this strategy could work, but I’ve been having the best success lately with this strategy in the gold market. It’s a small sector to begin with, but it’s also loaded with plenty of small companies that can make big percentage moves on a daily basis.

Even before the stock market exhibited some sizeable volatility, gold mining stocks could easily move 2-3 percent in a day. Now, many of these stocks will move 5 percent or more on a busy day for gold. It doesn’t matter if it’s one of the larger names in the space like Goldcorp (GG) or one of the smaller producers like Yamana Gold (AUY). High potential daily returns are there, and it’s a repeatable trade that you can come back to time and again.

Even better, by buying a call option on these stocks instead of the actual shares, you can get much more bang for your buck. Instead of making 4-5 percent on a swing, returns in the 15-20 percent range in the course of a week are possible.

Finally, if you’re more conservatively minded, these stocks have so much volatility that they have plenty of options premium. You can make a great annualized return by buying shares, then selling near-the-money covered call options a few months out. If you don’t get called away, you can keep selling calls indefinitely. If you do get called away, you can make low-double-digit returns owning a stock in the space of a few months.

What makes the gold stocks even more attractive is the fact that the price of the metal itself is rising. Since bottoming out in early 2016 around $1,050 an ounce, the yellow metal has been gradually rallying. It’d be tough to bet on the price of the metal itself, as its rallies have been slow and it’s been prone to sharp declines along the way. Nevertheless, it’s been gradually making higher highs—and higher lows when it does pull back.

This is just one of many strategies for dealing with increasingly volatile markets. Rather than being adrift in a storm owning the entire market, there are plenty of ways to take better control and put yourself on a market-beating path. Make sure you’re using all the tools available. We may not get back to a rip-roaring bull market anytime soon, but if stocks trade sideways, there are some great ways to take advantage of the volatility for market-trouncing returns over time.

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.

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Investors looking for market-beating results should look to smaller companies. Any firm outside the S&P 500 likely has zero to near-zero weighting in most market indexes that investors clamor for today.
stock, picker, market, investors, gold
Friday, 13 April 2018 05:53 PM
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