Wall Street Wall Flowers Offering High Quality at a Discount

Posted by Don Lucek - Money & Markets

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Is it for real?

That was the question I was asking when the S&P 500 kept flirting with the 1,900 mark. Now, with the index notching up one closing record after another and trading solidly in the 1,920s range, I’m becoming a believer.

Why does it matter? Because now is the time for even long-term investors to add equity market exposure for the summer months. I’m even seeing some cues emerging from the Weiss Ratings model results that point me to certain sectors and industries for gaining fresh exposures. I have highlighted both the healthcare and consumer discretionary sectors as fertile ground for stock pickers to find those with high Weiss Ratings that have become wall flowers at this latest sentiment-driven dance of a rally. I still feel those areas should be explored by serious investors who recognize high quality at a discount.

That’s really the crux of what I do here at Weiss Research. I take the results of a very successful set of combined algorithms, which assess stocks mainly on their companies’ fundamental strengths — like sustainable cash-flow growth, and a well-managed balance sheet — but I also take into account forward-looking cues from the market, in the form of share price performance and volatility. The end result of these algorithmic observations is a ranked list of potential investments, which, if successfully analyzed further, can lead to above-market returns on a consistent basis over time.

image1               Opportunity may arise in materials, one of the most economically-sensitive sectors, as a result of the summer’s trading.

While the Weiss Ratings capture short-term hreats (such as the negative trend in healthcare ratings versus their market-beating performance over the past month), it still points us to potential winners in this sector that is clearly in the line of fire for politicians in the U.S. this summer and fall because of Obamacare. That said, it appears to me that some of the top service providers — like insurers, but also some of the distribution-centric industries — may suffer most in the near term, so we should probably wait until fall to revisit them.

My picks from my last column on healthcare still stand, even those in the potential trouble spots, for longer-term time horizon investors. However, I am getting warmer on some of the device companies that have taken it on the chin lately. I’m eyeing them for my subscription service as shorter-term potential trades during the next few months. Of course, my focus is on those stocks that have pulled back, but still retain a B- or better Weiss Rating.

On the back of a sentiment-driven stock market rally over the past couple of weeks, I am seeing more and more stocks falling in their Weiss Ratings, in some cases despite upticks in current market prices. So even though I maintain my bullish overall view on stocks, I think it’s time to refocus on disciplined investing in those areas where Weiss Ratings are rising, and take note of the reasons for weakness in our ratings for those that are falling.

That divergence — rising stock prices and falling ratings — has kept me slightly cautious in deploying new capital in general for my subscription service. That’s because despite a stable environment in terms of earnings growth expectations following the first-quarter earnings season, forward-looking expectations remain stubbornly low in relation to the market’s seeming buoyancy. These are not only cues to shorter-horizon traders, but also to longer-horizon investors about what might happen in the very short-term — “noise”-type news flow that can either set up a short-term trading opportunity, or signal a buy or sell order from even the most long term-minded investors.

While the rest of the market (including me) focuses on macro trends that affect the economically sensitive sectors, providing entry points for new names, it’s also important to remember the principles of portfolio management that tell us to have at least some exposure (underweight though it may be) to industries and sectors that do not correlate with those stocks in your main thrust (in our Weiss Ratings Portfolio’s case, that is the resurgence of pro-cyclical areas of the economy).

I have added a defensive name recently, and did so to buttress the Portfolio’s diversity as I position it for the second half of 2014. Opportunity may arise in materials, one of the most economically-sensitive sectors, as a result of the summer’s trading. But I’m after those that pass both the Ratings gauntlet (or soon to do so) and a fundamental scrutiny. Pro-cyclical is how I intend to increasingly position the Portfolio for now.

Best,

Don Lucek

P.S. Watch your inbox today after the market closes for Mike Larson’s afternoon edition of Money and Markets. Mike will give you a market roundup, a top story for the day, and an opportunity to share your thoughts on his blog.