Mon Mar 31 2014
Live Index (1448 articles)

Stock Pickers Rule

The rising tide of the great bull market has lifted most boats, but some strategies that trounced the index last year are also ready for what might happen next. Here are three possible scenarios…

1) Big Q2 rally that takes the S&P 500 to 1,950 and higher into earnings season

2) Volatile, sideways action in a range between S&P 1900 and 1750 into summer

3) Big correction that takes out the Feb lows and heads to S&P 1600

I’m going to tell you about a strategy that did very well in the in the past year – more than doubling the 32% return of the S&P 500 in 2013 – and that could very well continue to outperform in 2014.

More Gains Ahead

If scenario #1 is the most likely outcome, it is because of support from both the fundamental and technical backdrops. Fundamentally, the economy is growing sufficiently to keep recession at bay, and the Fed is still “on our side” with a commitment to low interest rates for another year. These are two of the biggest factors that attract money into stocks, in addition to corporate earnings power.

Speaking of earnings, the S&P is on its way to another record year. A 16X P/E multiple on forward EPS estimates of $ 117.50 gets you S&P 1880 for fair value. But we know that in a strong bull market, that multiple can expand to 17 or 18X.

And with big macro worries about Europe, China and Washington once again on the sidelines, my favorite line from last year is still true: money managers are heads down, picking stocks.

So I am sticking with the strategy that got me here, where I “follow the money” of institutional portfolio managers – those running $ 100 million or more – as they pile into growth stocks. By matching the earnings momentum of Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy) stocks against a database of SEC 13D-G institutional filings, I can screen for stocks that are under accumulation by the investors who move markets.

While I can’t buy every stock I find that meets these two criteria, what I get is a solid list of names to do some homework on. I pour over the analyst reports to find out why they are raising estimates, and I try to see what the institutional buyer saw that made him or her plunk down enough cash to amass a 5% stake in the company. More on this strategy and some of the successful picks in moment.

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11 Institutional Buys to Follow Today

Big in-the-know funds and pension plans try hard to keep others from spotting their key moves too soon. They need time to go all in, drive up the prices, and make big profits.

Before now, you could only catch their moves early if you had the time and expertise to comb through obscure SEC filings. Today, a Zacks strategy brings the best of them to you at “first sniff” so you can enjoy the full profit ride. During 2013, this approach was Zacks’ best performer, more than doubling the S&P 500 with a stellar overall gain of +66.4%.

See its 11 “Smart Money” stocks right now >>

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Home on the Range Scenario

Markets are all about investing under uncertainty. And few markets are more uncertain than the ones gyrating back and forth in a volatile range, as bulls find that “buying the dips” has become more challenging and bears believe that finally they have the BIG correction they’ve been predicting.

But do you know what professional money managers like Steve Mandel of Lone Pine Capital, or the many funds of BlackRock, or even Carl Icahn do? First, they check to make sure the fundamentals are still in place that warrant a bull market vs. a bear market.

Then, they keep focused on picking exceptional stocks that others are irrationally selling, because these investors look out past the volatility to what they see as the true and fair value for their investments that will be realized over time.

Now this is where my screening gets a little trickier because I am using the Zacks Rank, a short-term earnings momentum model, against the longer holding periods of the “whales” of the stock market, my name for the institutional investors. For this, I simply try to make sure I am buying in the lower end of a value range by some combination of technical or timing opportunity.

Often the timing opportunity is simply being very quick as soon as I see the “whale” announce his or her position. Other times it means waiting until the stock comes back a bit. In either case, it has led to many 20%+ winners for the portfolio. One of my best sector/industry plays of the past year has been biopharma and biotech. As you probably know, this area also outperformed the broad market by more than double.

With solid gains in names like Valeant Pharmaceuticals (VRX), Pharmacyclics (PCYC) and Endocyte (ECYT), I have tried to capitalize on the long-term trends in healthcare and medicine that are definitely on the radars of the whales. In a sense, I am using their superior research teams and their capital to make outsized gains for my customers.

Other sectors and industries where this has worked terrifically are Retail, Energy and Technology. Remember, in the era of QE, money rarely leaves the market and goes to cash. It simply rotates to the next hot area.
What If the BIG Correction Comes?

This is the scenario that every investor fears the most, and none of us can predict. All we can do is play the odds. What I do is assign probabilities to potential outcomes. And right now, the correction scenario is gaining some traction, but it is still the least likely.

Among our 3 scenarios, I am currently at a 60% chance of #1 (Bull Charge Continues), a 25% chance of #2 (Big Sideways Range) and a 15% chance of #3 (BIG Correction). Even the largest asset manager on the planet, BlackRock, recently said that the market is “fairly valued.” But does this mean they are selling all of their stocks and advising their clients of the same?

Of course not. They are stock-pickers. They know they can outperform a frothy or fairly-valued market by picking the best growth opportunities.

But if a big correction does become more likely, it doesn’t mean you run for the hills either. The whales certainly aren’t doing that. After they sell some of their big winners, they are buying new stocks on the way down. And if you’ve ever experienced a several month correction or a bear market before, you know that they are full of violent 2-3% rallies where individual stocks can move 5-15%.

Bottom line: you want to be positioned for those rallies by getting into great stocks that the whales love – when they are on sale. All this requires is having a formula and the discipline to follow it.

My edge is not that I am the greatest stock picker in the world. But I know how to follow some of the best and overlay my own “margin of opportunity” parameters.
That Is How We Beat the Market by More Than 100%

You can do it, too. Of course, you can track those whale investors from their earliest filings if you have the time and resources. If not, just turn to our Zacks Follow the Money Trader.

This strategy monitors a vast, ever-changing database to detect the best trades before funds and plans fully build their positions and before other institutions join in and drive up the prices. Then we filter down those moves even further through our proprietary indicators. Right now, only 11 stocks make the grade as FTMrecommendations.

That is how we more than doubled the robust S&P 500 for an overall 2013 gain of +66.4%. Today, the whales are really biting and the portfolio is seeing a lot of activity. So I have an interesting invitation for you. Come see our real-time buys and sells, along with those of all other Zacks services, for the total sum of only $ 1.

Share 11 Follow the Money trades now >>

Good Investing,

Kevin Cook

Kevin, a Senior Stock Strategist at Zacks, is a recognized authority in global markets and noted for predicting and tracking the movement of smart money. He provides commentary and recommendations for the Zacks Follow the Money Trader.

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