By: Chris Rowe — July 19, 2019
This Stock Probably Triples
Hello and happy Friday!
Today, you'll hear about one stock that has the potential to triple in price in the next 12 months.
It's one of today's top 10 biggest percentage gainers on the Nasdaq.
You may want to consider buying it on Monday.
It's one of my favorite positions in a trading advisory service that I manage.
This isn't meant to pitch you some service that I offer so I won't get into that part. But the point is the service strictly recommends stocks of companies that have specific fundamental criteria as well as technical criteria.
I'll explain that to you today.
When you pick a stock to invest in for a LONG-TERM position, I highly recommend that you focus on two things:
First, if you're using fundamental analysis, you want to look at things that tell you whether the management team is strong and capable. A strong management team is what will determine the growth of the company over the long-term.Everyone has a bad run now and then. We all have to deal with a bad economy now and then. But a strong management team perseveres.
Second, you want to know that institutional investors believe in the company and the industry its in, and you want to know how strongly institutional investors believe in it.
While some "expert investors" may tell you how important it is to track insider buying (management buying their own stock), the fact is the management team are the most biased investors in that stock. They wouldn't be working at the company if they thought it had a bad future. Institutional investors are objective and they constantly analyze companies future prospects.
And if you understand "the wisdom of crowds" - where you have 20 people guess how many jellybeans are in the glass jar and everyone is way off on their guess but when you average the guesses, the number is amazingly close to correct - then you understand that institutional investors' collective estimates should be respected more than anything.
And the collective estimates are seen based on the fact they are buying the stock!The stock that I think is likely to double or triple, that I recommended a year ago in my exclusive trading service, has a strong management team as well as institutional "sponsorship" (they think it's going higher).
I'll tell you what criteria we look for in this particular service and I'll explain why the stock is likely to double or triple in a year.
(Click any image to enlarge)
Here's a 3-year weekly chart of the company I'm referring to: Exponent Inc., (Symbol: EXPO). The price spike you see here happened today. I don't expect it will pull back very much from here.
Here's a 1-year daily chart:
Investors tend to look at technical or fundamental criteria at the time of purchase but then get spooked when that criteria changes. Don't make this mistake!
And yes, in certain cases, when the technical or fundamental picture changes, then the outlook should change. But there are many different technical or fundamental parameters to consider and some of those parameters speak to things that do not change.
For example, certain things about the company's fundamentals tell us management is savvy, knows how to run a company, is efficient and smart about how they invest their capital. This usually doesn't change. Once we know this about the team that runs the company, we can feel confident when the company hits short-term speed bumps.
Also, when a company doesn't have very high estimates in their earnings or revenue, there's always a decent possibility the company will beat earnings expectations, pushing the stock higher, as is the case today with Exponent (EXPO).
Over the past year, the company has surpassed consensus EPS estimates in all four quarters.
Today, they announced quarterly earnings of $0.39 per share, beating the Zacks Consensus Estimate of $0.33 per share. In their previous earnings announcement, it was expected that they'd post earnings of $0.35 per share but actually posted earnings of $0.42.
The trading service that I recommended this stock in last year is the most stress-free trading service I have ever managed. It's long-term in nature and I'm actually able to lock in profits, like the one we see today, without giving up future potential upside.
But even if you aren't using a risk management strategy like mine, this is a good stock to own - even up here at this price.
The specific criteria that is required before taking a position makes us feel confident even when the company or stock goes through those speed bumps I mentioned earlier.
If we know the earnings and/or revenue is accelerating, for example, we know that the management team is pretty strong. Anyone reading this who has grown a business over the course of 10 years or more knows this is true.
When I say "accelerating earnings or revenue", I'm actually referring to a little trick that was taught to me back in the 90s by a very successful institutional investor named William O'Neil. You may know him as the founder of Investors Business Daily (the financial newspaper competing with the Wall Street Journal).
When a company reports quarterly earnings (or revenue), we compare their quarterly earnings numbers to the same quarter from the previous 12 months. This way, we aren't just looking at the earnings growth from one quarter to the next, but instead we are stripping out seasonal effects by comparing it to the previous year.
For example, if the most recent quarter shows a 20% earnings growth compared to the same quarter last year (last year in Q2 they earned $1.00 per share and this year in Q2 they earned $1.20), and then in Q3 of this year they earn 80 cents a share compared to earning 60 cents a share, their earnings are up 33% compared to the same quarter last year.
So in Q2 they grew earnings by 20% and in Q3 they grew earnings by 33%.
Many investors would make the mistake of seeing $1.20 earnings for Q2 and 80 cents in Q3.
What if they earned $1.50 in Q3 last year and $1.60 in Q3 this year? The company would look like they're doing well but in reality they went from 20% earnings growth to 6.6% earnings growth.
Let's look at what happened to EXPO.
On the left is what we saw last year.
The earnings growth wasn't perfectly accelerating but you can see on the lower left that it was pretty much accelerating.
Their quarterly earnings growth looked like this:
If you look to the right of that, you can see revenue growth that was somewhat accellerating.
The fact that this went on for two years said a lot about the management team.
And the 5-year earnings growth was 7%, which made this a stock that flew under the radar of Wall Street, except for a few hundred smart funds.
That brings me to the technical picture
We want to see more and more funds buying the stock. It's a very strict rule that we have for this particular trading service. All of the new positions I establish show this fundamental picture.
And here's the big takeaway for this article...
In this trading service, although I update the position every month, I don't continue to update the company's fundamentals, as the company reports from one quarter to the next. The reason being, the fundamental picture that I focus on is one that says the management team is capable. So even if there are hiccups along the way, it's okay. Reporting on the hiccups would be a DISTRACTION to my members.
Take a look at the current picture, on the right. You can see that earnings and revenue actually didn't continue to accelerate. But that's okay. They had been accelerating for a long time before we bought in.
Compare the number of funds who own it from quarter to quarter on the left side (at the time of my alert) to those on the right side (most recently reported).
At the time of the alert, the number of funds who owned it wasn't increasing dramatically, but I did see strength in the sector and the individual stock chart.
Number of funds who owned it:
- September 2017: 317 funds
- December 2017: 326 funds
- March 2017: 332 funds
- June 2017: 331 funds
Since institutions were buying the industry like crazy... and the stock didn't trade a heck of a lot of volume... and the accelerating earnings and revenue told me that management was capable of doing well for a considerable amount of time...
I assumed it was likely that more and more funds would be buying the stock and the increase in volume would push it a lot higher.
The last 4 quarter fund ownership looks like this:
- September 2018: 357 funds
- December 2018: 397 funds
- March 2018: 416 funds
- June 2018: 399 funds
Individual investors don't always look at what's most important and they often want to see perfection. They head for the hills of on a quarterly basis if the company doesn't do what analysts say they think the company will do.
Exponent (EXPO) has proven that the management team is strong. Institutions clearly agree. The fact that they are humble means they don't boast and brag about what they expect for the future, which means likely earnings surprises.
If you're a long-term investor, pay attention to long-term things like management teams.
Warren Buffett puts a strong emphasis on a company's Return on Invested Capital (ROIC). This is like return on equity but it takes the company's debt into consideration.
But back when I was a rookie, William O'Neil was kind enough to teach me to pay close attention to Return on Equity. This tells you how good a management team is at deploying capital, which is probably the most important thing you can think of.
Last year, the company had a return on equity that was about industry average: 18%.
But this year the return on equity has jumped up to 23%.
The higher that number goes, the higher a PE (price to earnings) ratio Wall Street will feel comfortable with regarding the stock. Basically, the stock trades at a "multiple to earnings". If the company is expected to grow faster, then the stock will likely trade at a price that's a higher multiple to their earnings.
This is one of my favorite positions in that stress-free trading service that I told you about a moment ago. The stock has traded from $49.00 to $70.00, a gain of 42% in a time frame the S&P 500 gained 6.3%.
But because of the specific way that we structured it, OUR version of this position is up 116%.
One of the reasons we call this the "stress-free" service is: I'm also making use of a trick I learned in my Wall Street days to generate a 66% "dividend" from this position.
Had I not generated that income along the way, essentially removing 2/3 of the risk (originally invested capital) we would only be up 88% -- still much better than the 42% the regular stockholders would have seen.
I'm going to bring this exact strategy to anyone who attends a live event that I'm holding on July 25th at 1:00PM eastern.
If you'd like to sign up for the event, you can do so here.
If not that's fine and I hope that you do well with EXPO, investing in it the standard way.
Please trade safely!