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8 Critical Tests a Stock Must Pass Even in an Explosive Bull Market

By Matt McCallAug 01, 2020


Maybe I’m in a bit of a betting mood with sports ramping up again.

Or maybe I just like talking about making money.

If you haven’t heard, my friend Louis Navellier and I have a friendly wager related to investing. Will the Dow get to 40,000 before bitcoin? Or will bitcoin win The Race to 40K?

Louis says the Dow, and I say bitcoin.

We’re sitting down 1-on-1 to present our cases next Wednesday at 4 p.m. ET. I can’t wait, and I hope you’ll join us.

As we get ready, we’re also sharing some of our analysis with you ahead of time. Today, I’d like to turn MoneyWire back over to Louis for more on why he thinks stocks will be the winner.

But don’t worry. I’ll be back tomorrow with a look at a couple of big catalysts set to drive bitcoin higher.

Either way, there’s a lot of money to be made. And that’s really what this is all about.

Best regards,

Matt McCall
Editor, MoneyWire

8 Critical Tests a Stock Must Pass Even in an Explosive Bull Market

Hello, folks. If you’ve been following along this week, then you know about Dow vs. Bitcoin: The Race to 40K, a live event that I am hosting with my fellow Investorplace analyst Matt McCall next Wednesday at 4 p.m. ET.

But if you haven’t seen any updates, allow me to fill you in: Matt and I both see the market rallying over the next year; however, I expect Dow will reach 40,000 first while Matt looks for bitcoin to hit the 40,000 mark first.

Let me start off by saying that I hope you’ve enjoyed the articles from Matt. As far as my articles go, we have talked about why I think stocks are the best game in town. On Thursday, I explained why interest rates could be a catalyst to push the Dow from 26,000 to 40,000, making it not just possible – but probable.

The reality is the Dow reaching 40,000 is going to be a huge milestone for bullish investors. I am certainly looking forward to the massive bull rally over the next year! However, I don’t even need a bullish market to maximize gains in my portfolios, thanks to the beauty of my stock-picking system.

No matter the market environment, my tried and true Portfolio Grader has helped me find all of the biggest winners in my career.

So, today, I want to share the “secret sauce” behind my growth investing strategy.

Now, every stock I recommend must pass these 8 critical tests first:

  1. Sales Growth: the percent change in a company’s sales this quarter versus the same quarter last year. Companies that show increasing sales at a very high rate are among the best candidates to become big winners over time. If a company can continually increase sales over long periods of time, then it would seem to indicate that they have a product or service that is very much in demand. I look for companies that show year-over-year sales growth of 20% or more.
  2. Operating Margin Growth: the profits left after direct costs such as salary and overhead are subtracted. I then look at whether this percentage margin is contracting or growing year-over-year. A company’s operating margin will increase when its product is in such high demand that the company can continue to raise prices for the product or service without an offsetting increase in costs.
  3. Earnings Growth: the percent increase in a company’s earnings per share (EPS) this quarter versus the same quarter last year. EPS is just the company’s earnings divided by the number of shares they have outstanding. Naturally, companies that are continually growing earnings year-over-year get a higher score than those that aren’t.
  4. Earnings Momentum: how rapidly a company’s earnings have been accelerating over the past four quarters. Companies that are accelerating and growing earnings faster year-over-year are stronger candidates for my Buy Lists than those where earnings are slowing.
  5. Earnings Surprises: a company’s ability to exceed the consensus earnings estimate among Wall Street analysts. Here I am looking for stocks that can exceed what Wall Street believes they can achieve. Stocks that deliver positive surprises for several successive quarterly earnings periods often go on to become growth stock megastars.
  6. Analyst Earnings Revisions: the size of raised magnitude in which earnings projections have increased over the past month. When an estimate is raised, it has tremendous positive implications fora company and its stock. If the expectation is up, then the stock should be worth more —and rise in price to reflect that fact.
  7. Cash Flow: the money the company has left after paying the cost of doing business and the upkeep and the maintenance needed to stay in business (relative to its total market value). In simple accounting terms, free cash equals operating earnings minus the capital expenditures needed to run the business. This is especially important for dividend stocks. And in a bear market, analysts suddenly emphasize this part of the balance sheet above all others. It shows if the company has the liquidity it needs to ride out the storm.
  8. Return on Equity: a company’s profitability in terms of profits made from the money shareholders have invested. It is calculated by dividing the earnings per share by the equity (book value) per share. The higher the number, the more profitable a company is, and the higher return management is providing to shareholders.

From there, a stock must also prove its mettle, so to speak, on Wall Street. When it also earns a strong Quantitative Grade (my proprietary measure of institutional buying pressure), it becomes an urgent buy in my Portfolio Grader.

This system allows me to  avoid the bad stocks and also signals when to sell a stock if its fundamentals begin to deteriorate or institutional buying pressure dries up. By concentrating on the numbers, my system takes the guessing out of picking winning stocks.

Take CyberOptics Corporation (CYBE), a company specializing in 3-D sensing technology solutions, for example. When the company smashed earnings in the first quarter of this year, my stock-picking system upgraded the stock from a Hold to a Buy. I told my Breakthrough subscribers to buy the stock in May, due to the positive earnings forecast and strong fundamentals that my system picked up on.

CyberOptics released its second-quarter earnings announcement last week and, once again, crushed expectations, with an over 200% earnings surprise! The stock is sitting pretty at a 29% gain in less than three months since my initial recommendation!

And I’ve got much more where that came from. At my debate Wednesday with Matt McCall, I’ll be giving away another of my favorite Breakthrough Stocks, to prove the exciting opportunities available for stock investors right now.

In the meantime, you’ll be hearing from Matt tomorrow. He’ll share some of the positive rumors swirling around in the cryptocurrency community, as well as the major catalyst he’s eyeing to win our bet, The Race to 40K. And then Monday, I look forward to talking with you about the earnings environment that helps make MY case for stocks!

Be sure to tune in to our debate on Wednesday at 4 p.m. ET, where Matt and I will thoroughly debate whether stocks will reach that milestone first, or if bitcoin will. I’m very confident I’ll win. And that you’ll see the explosive potential of the stocks my Portfolio Grader is uncovering now. You don’t want to miss it!

Again, I’ll be giving away one of my favorite stock picks on Wednesday…and remember, this event is 100% free, no strings attached.

As I say, I’m putting my money where my mouth is – and so is Matt. He’ll also be giving away a pick for free, to help investors profit as bitcoin also climbs to 40K.

I’d never bet against Matt, long-term. I simply think that my horse in this race will get there first.

Sincerely,

Louis Navellier

Matt McCall’s MoneyLine Podcast

Click here to listen to Matt McCall’s MoneyLine podcast! This week, Matt talks about a friendly wager he’s made with friend and InvestorPlace colleague Louis Navellier. Louis says the Dow is on its way to 40,000. Matt agrees but thinks bitcoin will make it there faster. He talks about the market, breaking down the latest GDP numbers and earnings results. And finally, Matt expresses his excitement that sports are back. Not just for personal reasons. There are investment implications, too!

You can subscribe to this podcast on iTunes, Stitcher, Spotify, or wherever you listen to podcasts.

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