The market volatility over the last few months has been painful. The good news is that corrections don’t last forever. While this move in the market might have put a dent in your portfolio, wise investors are looking forward to 2019 and where to concentrate their portfolios.
When we think about being positioned best for the market, we can start with the idea of two investing styles: growth or value. Then we can look at the two basic sizes, big or small. Whether we decide on growth or value and whether to focus on big cap or small caps, we need to have a plan.
The correction, as most market pullbacks, brings opportunities for investors. It is not easy to pull the trigger when stocks are falling for any myriad of reasons. Still, the disciplined investor that believes better times are ahead will be rewarded for being both patient and brave. Let’s take a look at how I plan to position a portfolio for 2019.
Growth or Value?
The first question you have to ask is whether you are more comfortable as a growth investor or a value investor. It is a simple thing really, do you like stocks that move up or are you looking for stocks that have bottomed? Sure, I have oversimplified it here a bit, and there are good and bad things about both perspectives…
The negative about being a growth investor almost always involves the idea of chasing a stock at the top. The valuations might seem too big to many (especially the value crowd). These stocks are also found closer to the 52-week high than the low. Finally, the exit strategy for a growth stock is often a dicey scenario, one in which value investors will say you need to find a “greater fool.”
Value investors don’t have it any easier. They have to be right when they enter the stock… really right. Of course the ego involved in being a value investor might make that an easy decision. Those stocks are hated, trade at great multiples and are near the 52-week lows in most scenarios. The problem is that you are catching a falling knife. Often times, investors see things that go down big and then continue to go down big.
Personally, I am sticking with the idea of being a growth investor for 2019. The correction has made most of growth names a good deal cheaper, so let’s talk about market caps.
Big Cap Vs. Small Caps
If you are still reading you are probably like me, a growth-focused investor. I am not saying that value investors are the enemy, I just find growth investing more rewarding. Let’s focus now on where to be looking for growth stocks.
There are three basic market cap sizes. Small, mid and big. The small names are inherently the most risky with the big cap names seeing less risk. Stuck in the middle are the mid-caps, which can actually offer the right amount of risk for investors.
Question is, where am I looking in 2019 for growth? The recent correction has really put a hurt on the small-cap growth names. I am not so sure that they will recover at the same pace as the rest of the market. The big caps that didn’t get beat up have a good chance of gaining ground, but the mid-caps look even better to me. With the right recipe, mid-cap growth names could be the best performing group in 2019. Continue reading . . .
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The Right Recipe For 2019
Now that we know approximately where to look, let’s talk about a few other things we need to see to have the best results. Some of these macro ideas are more guidelines of when you might want to shift strategy because, generally speaking, they are out of your control.
The first idea is layoffs. We got quite a scare when GM recently announced job cuts for around 15K people. That is the sort of thing we would see heading into a recession – but we would need to see several other large companies follow suit with multi-thousand layoffs. If there aren’t any other big job cuts by the end of the first quarter, we should be fine.
Next, we need these trade wars to get resolved… and fast. We all know the President is going to do what he wants to do, but the indecision in the marketplace makes it super easy to sell first and ask questions later. Resolution of trade issues will clear the path for sustainable gains.
The ideas above are really out of the control of investors. Sure, we want lower and stable interest rates, no layoffs and trade war resolution, but those things are pie in the sky if we cannot get into the right names in the first place. Luckily, we have a solid process for that.
In scanning for the best growth stocks, wise investors will look at more than just the topline expectations. The best growth stocks are the ones that come with improving margins. This tells me that while there is demand for the service or product, the company is getting better at delivering it.
Don’t get me wrong, there is more to stock selection than just revenue growth! I love to see earnings growth along with revenue growth. So a stock that is seeing good revenue growth and better margins will undoubtedly have higher earnings. The Zacks Rank can help me cut right to the chase. The better the Zacks Rank, the better chance that I have already found what I am looking for.
Finally, in this market you have to stay on top of your portfolio all the time. The volatility has been brutal of late, and it isn’t expected to decrease any time soon. Watching all the names in the portfolio is often a thankless job, but a necessary one. Along with proper diversification, staying up on the news is critical to success in 2019.
We focus on small and mid-cap growth stocks with great Zacks Ranks. That means they are among the stocks most likely to outperform in the months ahead. And I’m constantly scanning important news events to understand how they’ll impact the market.
The portfolio has generated outstanding results. We’ve recently closed gains of +100.1%, +161.0%, and +214.2%. 1
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