In most of my Market 360 articles, I talk about how to find great buys in the market. But today, I want to discuss how to tell when it’s the right time to sell.
In order to find great stocks, I assess the company’s fundamentals — eight specific factors, to be exact — and the money flow into the stock. When those tides begin to turn, they become signals to sell, rather than buy.
But those signals are not always clear.
Load Error
I analyze data on almost 5,000 stocks every week, focusing on these eight fundamental factors. I based my “Moneyball” system on the same idea.
Take Power Integrations, Inc. (NASDAQ:POWI) for example.
Back in mid-March, I added Power Integrations to my Breakthrough Stocks Buy List, given its strong forecasted earnings and sales growth.
Power Integrations is a leading provider of integrated circuits (ICs) for more energy-efficient AC-DC power supplies, as well as offers ICs that are powering the switch to LED lighting. The company also supplies gate drivers that are utilized by solar and wind energy systems, electric transportation and industrial motors.
Power Integrations has benefited from the move to more energy efficient forms of electricity. Not only has the company been awarded the ENERGY STAR, it’s also been named as a Top 20 Sustainable Stock twice and received the Star of Energy Efficiency award.
During the second quarter, Power Integrations reported earnings of $0.66 per share on $106.8 million in revenue. That represented 3.9% annual revenue growth and 17.9% annual earnings growth. Analysts were expecting earnings of $0.64 per share and revenue of $106.36 million, so POWI posted a 3.1% earnings surprise and a slight revenue surprise.
But POWI started giving off certain warning signs by September, at which point I recommended that Breakthrough Stocks subscribers sell and book a 31% gain.
The first red flag was Power Integrations earnings momentum. Overall, POWI gets a “B” for Earnings Growth in the stock-picking system I use for Breakthrough Stocks.
Gallery: 4 Growth Stocks Ready to Roar (InvestorPlace)
It was in 2013 that Wharton finance professor Jeremy Siegel opined that stocks will remain the best bet in the years to come. Even as markets trade near all-time highs, this opinion is unlikely to change. However, investors need to be careful in terms of picking growth stocks and having a diversified portfolio. In a well-diversified portfolio, stocks from mature industries provide an attractive dividend and help in reducing the portfolio beta. On the other hand, high-growth stocks serve as catalyst for upside in portfolio returns. Therefore, growth stocks are important to hold in the portfolio. This column will discuss four growth stocks to buy that are likely to benefit from behavioral changes due to the novel coronavirus pandemic. 10 Buyout Stocks With Long-Term Potential These stocks have a robust earnings growth outlook for the next five years. Further, it’s likely that earnings growth can potentially accelerate due to the pandemic impact on the way business is done. Etsy (NASDAQ:ETSY) JD.com (NASDAQ:JD) Netflix (NASDAQ:NFLX) Shopify (NYSE:SHOP)
Growth Stocks to Buy: Etsy (ETSY)
With a projected annual earnings growth of 26.5% for the next five years, ETSY stock is among the attractive growth stocks to buy. Given the company’s business model of connecting buyers and sellers online, it stands to gain from changing trends. With the novel coronavirus pandemic, sellers are increasingly looking at setting up an online store. Etsy will benefit from this in the coming years. An early indication of this is already visible in the company’s second quarter results for 2020. The company reported a 136% surge in revenue and a healthy 35% growth in adjusted EBITDA. Among the positive trends, Etsy witnessed healthy growth in repeat and habitual buyers. With the company having a global presence, there is a big addressable market. According to Etsy, it’s in the range of $1.7 trillion. The company’s free cash flow has grown from $28 million in the first quarter to $220 million for Q2. With an annualized FCF of $880 million, the company is well positioned to create value. Further, as earnings growth remains robust, FCF growth is also likely to be strong. For the current year, ETSY stock has moved higher by 180%. However, I believe that there is more upside in the coming quarters. Given the current trend, the company is likely to surprise in terms of earnings growth and that will keep the stock momentum positive.
JD.com (JD)
I like JD stock from a growth perspective and also from the perspective of regional diversification. JD.com provides investors with exposure to the largest retail market in the world. It’s not surprising that the company’s earnings growth is likely to be robust in the coming years. Last month, the company reported that second-quarter revenue increased by 33.8%. In addition, the company reported strong growth in annual active customer accounts. This trend is likely to sustain with the company making inroads into semi-urban and rural markets. 10 Buyout Stocks With Long-Term Potential One factor that sets JD.com apart from other Chinese e-commerce players like Alibaba (NYSE:BABA) and Pinduoduo (NASDAQ:PDD) is its robust logistics network. This gives JD.com a relative edge when it comes to market penetration in China. For the last financial year, the company reported free cash flow of 19.5 billion yuan ($2.85 billion). Strong FCF allows the company to pursue aggressive organic and inorganic growth. Recently, the company acquired Kuayue-Express Group, which is an integrated express transportation enterprise specializing in “limited-time express service” in China. Overall, JD.com has a strong growth visibility, steady improvement in margins and ample financial flexibility. These factors make JD stock attractive for the coming years and I expect the upside momentum to sustain.
Netflix (NFLX)
For the next five years, analysts expect the company’s annual earnings growth at 30%. Without doubt, NFLX is an attractive growth stock to buy for the portfolio. As earnings growth remains healthy, NFLX stock has been trending higher. However, the company has witnessed strong subscription growth during the pandemic as people look for a source of entertainment during quarantine. In the second quarter, the company added a record 10.1 million paid membership as compared to 2.7 million in the same quarter a year ago. I would not be surprised if earnings growth guidance is revised on the upside for the coming years. Original content is the key to sustained growth. For the most recent quarter, the company reported $899 million in FCF. As the company’s financial strength increases, there will be headroom for investing in quality content. Netflix also has global presence with more subscribers outside the United States as a percentage of total subscribers. Therefore, the addressable market is significant and is another factor that will ensure that strong earnings growth sustains.
Shopify (SHOP)
SHOP stock is another attractive name among the growth stocks to buy. I like the company’s business model, which is likely to ensure steady cash flows over the long term. For the second quarter, the company reported 97% revenue growth on a year-on-year basis. The important point to note is that revenue from subscription solutions has been trending higher. The company has subscription solutions for entrepreneurs, small-and-medium business as well as large brands. 10 Buyout Stocks With Long-Term Potential As subscribers swell, the revenue and cash flow visibility increases. Further, brands generally start with the basic plan as advance to premium plans as business growth. Therefore, existing customers contribute to higher cash flows over time. Shopify also happens to be one of the businesses that has witnessed strong growth after the novel coronavirus pandemic. New stores created on the platform in in the second quarter increased by 71% as compared to the first quarter. With a global presence, strong customer addition can translate into upwards revision in earnings estimates. This is likely to keep the momentum strong for SHOP stock. On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
More From InvestorPlace
5/5 SLIDES
While POWI’s earnings did grow slightly in the second quarter, it’s not enough to see a company’s earnings grow — I also want to see them grow rapidly.
Think of this like assessing a car. Just about any car can make it to 60 miles per hour, theoretically. But not as many can make it to 60 mph smoothly … let alone as quickly as a Porsche or a Ferrari.
The same can be said of certain stocks. In the case of POWI, the analyst community has slashed its earnings forecast in half for POWI. Third-quarter earnings are now expected to decline 10.3% year-over-year to $0.35 per share.
And now, for its Earnings Momentum score POWI currently has an “F”!
Outside of the fundamentals, investors should always look at the momentum of a stock. That was the red flag that inspired me to go ahead and take profits on POWI.
With POWI’s fundamentals slipping, I waited for an opportunity to sell into strength. Whenever you can, I recommend resisting the urge to panic-sell a stock. Instead, hold out just a little longer for a good day.
Where to Find New Buys
The foundation of my Moneyball for Stocks system is based on uncovering companies with superior fundamentals and positive momentum.
When my current Breakthrough Stocks earnings forecasts’ revised higher by an average 39% over the past three months, I wasn’t surprised. Overall, my Breakthrough Stocks are characterized by 39.7% average annual sales growth and 325.1% average annual earnings growth.
So, clearly, my system is doing its job.
You can get the exact measures and how I use them in the replay of my presentation on my Moneyball Multiplier Challenge.
If you decide to sign up for Breakthrough Stocks after, you’ll receive my exclusive special report, My Top 3 High-Flying Moneyball Stocks Poised to Skyrocket by 1,000% or More — absolutely free.
In this report, I recommend three fundamentally superior small-cap stocks flying under the radar in today’s hottest sectors. For example, one is a player in the 5G wireless technology sector that’s undergoing rapid adoption in the U.S. and across the world. This company achieved the highest level of revenue in its history during the third quarter and is in a prime position to tap into the growing demand for highspeed internet with so many folks working from home.
It also holds a rare AAA-rating, which means it earns an “A” for its Fundamental Grade, Quantitative Grade and Total Grade. Get the full details, here.
Bottom line: Watch the recording of the Moneyball Multiplier Challenge to find out all the details of my “Moneyball” system. And, if you choose to join me at Breakthrough Stocks after, you’ll receive my exclusive special report, My Top 3 High-Flying Moneyball Stocks Poised to Skyrocket by 1,000% or More at no extra cost.
Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owned the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Power Integrations, Inc (POWI)
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation.