We all make mistakes every day. It is a part of life. But for many of us, making an error in judgment with our investments can be one of the most galling and frustrating mistakes of them all.
We tend to make some of the most egregious investing mistakes at the end of the year when we are not as focused as we should be on our portfolios and our stocks. Considering that the majority of stock gains tend to be generated from late November though the early part of the following year, if you do not scrutinize stocks during that time, you may not recover for some time. That is why it is paramount that you pay attention to what is happening with your stocks and others, or you will regret making this oversight many times in later months.
At year-end, the financial pundits talk a great deal about “the market,” what the market is doing, how it will finish the year, and the direction it could go next year, etc. Folks, this is a trap. With the exception of index funds and ETFs, for the most part you are probably investing directly in stocks. As you know quite well, oftentimes there is no correlation between the moves in the stock market and the direction of individual stocks. For example, many people are worried that the stock market is too pricey, or overvalued, or has moved too far too fast. While that may be true, there are a whole host of stocks that do not carry these characteristics. And investing directly in stocks based on one’s approach to the market can be lethal, since there can be little correlative effect.
This is the time to really perform due diligence and be extra selective. Seek out stocks that are trading with rising daily moving averages, and are above their 20-day and 50-day averages. More important, you should almost exclusively invest in companies that are expected to generate big increases in EPS from this year to next year. Many of them are actually still trading at P/E multiples below their historical averages and have been overlooked while the herd goes from one stock du jour to the next.
People believe that a new year means a fresh start. For the stock world, investors are more willing to invest in and give the benefit of the doubt to turnaround stories, like the Delia’s (NASDAQ – DLIA) story we recently profiled. Although a turnaround story may not materially change from December to January, given that it is a different year investors are inclined to believe in the underdog and begin accumulating it early. This is one of the reasons why The Dogs of The Dow theory tends to work like clockwork each year. Unfortunately, there is no comparable in the small-cap world.
In the absence of a real comparable strategy, avoiding high-flyers that will be sold off for profits at year-end and using the proceeds to invest in EPS growers or turnaround stories are likely the best plays for retail investors. Conversely, story stocks, unless related to the holiday season, tend to be laggards rather than outperformers. In any event, diligence is the key for year-end investing, lest you miss out on what is usually the most profitable time of the year.
Not knowing what a company really says in a press release can cost investors a significant amount of money.
Though many investors read press releases as soon as they come out, there is a major difference between reading the text and understanding what the company is saying in between the lines.
With that in mind, here are two examples of sleight-of-hand phrases or spin that management teams may use to mask the critical issues you need to know in order to make an informed decision about the stock.
We are at a typical crossroads in the stock market where the push-pull between bulls and bears has resulted many days of sideways trading. Are we due for a protracted selloff or will the market forge ahead during this year?
One of the best approaches to finding winning stocks in this environment is to follow the money. Even if the overall market is not doing much of anything there will be certain sectors that are under accumulation. Still, this does not necessarily mean that you should chase the best-performing stock in the sector or the stock that has the strongest gains in recent days. For example, if solar stocks are under accumulation (as they have been), some of the best ways to play the rotation into the segment is to buy shares of companies that are leaders in niche segments of the industry or just under the radar screen.
At The Stock Junction, our charge is to profile small-cap and microcap stocks as well as provide general investing strategy and tactical trading ideas. Every once in a while, major events occur in the investing world that require our insight and opinions in these pages, as they can and do affect the trading activity and valuation of the stock market’s smallest and most volatile companies.
New SEC-proposed rules governing equity crowdfunding activity is a great example. Although the crowdfunding arena is currently strictly for privately held entities, the start of equity crowdfunding activity could have a material impact on small-cap stocks and especially microcap stocks. Knowing and understanding how and why could be a critical issue for all small stock investors.
I have been watching a lot of baseball recently. The game last night reminded me that too often we focus on the characteristics inherent in small-cap and microcap stocks that we should buy, but we rarely perform the same exercise for those stocks in our portfolios that we should sell. With that in mind, we have a compiled a “strike-out” list. If a company whiffs on these three pitches, that stock should be gone . . . no ifs, ands or buts!
Expectations and Delays
Small-cap and microcap stocks have ever-evolving business models and business plans. Moreover, given that they are early stage in nature with senior personnel wearing multiple hats, it is very common for these companies to have delays in the implementation of initiatives and success in achieving publicly announced goals.