Trading the stock market can be a frustrating process: Back in March and April every market pundit was jumping on CNBC, Bloomberg, Twitter, etc and screaming “BUY EVERY PULLBACK!” Two months later, these same folks are freaking out and calling for a double dip recession or worse, a global depression.
It just so happens the stock market followed the same exact playbook as it did last summer, selling off in May. This selloff was attributed due to the uncertainty with the Greek elections and a banking crisis in Spain. Less than two months later, its safe to say that for now both issues have been resolved.
However, market pundits are preaching caution even though the S&P 500 looks to be flashing a buy signal after it completed a follow through day Monday and a pause day on Tuesday. I could see the market potential moving up to the S&P 1400 area again before the wheels fall off. Todays sell off can be attributed to the Federal Reserve staying on hold yesterday. For some reason, the market was obvious pricing in QE 3. On Twitter today Goldman Sachs is getting credit for the sell off. As the investment bank is out with a note recommending short positions because of the lack of QE and the weak Philadelphia Fed number.
This smells like a shake out. Remember back in April Goldman said to buy stocks (wrong call), then just this week the bank was calling for the Federal Reserve to implement a new QE program (wrong call) and now today they are recommending clients get short the market. To these eyes, it looks like Goldman wanted to cover some shorts.
After big scary shakeouts like the one we just had and are having today, I like to focus my attention on stocks that haven’t gone down too much (or actually have gone up) and have good sales and EPS growth (+20% or more). Typically, this easy formula is a good way to spot the next bull cycles winners.
I ran a screen searching for those three traits above and below are some of the names I hand picked to buy for the next Bull Run.
3D Systems (DDD) – The maker of 3D printing, prototyping and manufacturing systems. This company is the leading public company in the fast growing innovative 3D printing industry. It is my favorite stock in the market right now and I would love to buy it under $30. Sales are growing at 63% and EPS is growing at 47%.
Tripadvisor (TRIP)- If you aren’t familiar with this company, it creates online travel related content and trip reviews. If you are going on a vacation, this site is a must read. It’s sales are growing at 32% with a 43% profit margin!
Zillow (Z)- If you are looking to purchase a house, you better be using Zillow. The company provides online real estate data, connects buyers with sellers and helps connect buyers with mortgage professionals. Currently sales are growing at 92% and EPS at 180%! This could be the next great growth stock.
Sourcefire (FIRE)- Sourcefire provides businesses with network security and hardware. Their products are said to be next generation and superior competition. The company is growing sales at 50% and EPS at 175%.
Coinstar (CSTR)- This company operates the Redbox DVD rental kiosks, coin counting machines and soon to be Starbucks vending machines. Its 3-year sales growth is 34% and 3 year EPS growth is 74%. Full Disclosure: I own shares in CSTR.
I would use this list as a guide. I always like to buy stocks low and sell high. So today’s sell off is welcome. If we get a couple of more days like today, I would consider adding small positions in one or two of these names. As always, just do your own research.
Editors Note: The Investing Oracle believes all investment picks should be tracked and we intend to do so.
Matthew Theal holds a position in CSTR.
Today started the Federal Open Market Committee’s (FOMC) two day meeting on monetary policy. The meeting will conclude tomorrow afternoon with a decision on interest rates (unchanged), which will be followed by a statement of text (look for changes) and after that, the great Chairman himself, Ben Bernanke will give a press conference.
If you have followed my work from my time at Minyanville Media where I wrote the Active Investor, you know that for six months I have been predicting some sort of Quantative Easing to happen this summer.
It looks like that prediction will be correct as it seems some sort of QE will happen this summer.
Goldman Sachs believes that tomorrow the fed will announce some sort of new QE program. The investment bank, sees the possibility of the Fed buying MBS or just extended the Operation Twist.
The thesis is based on a June 6th speech on criteria needed for more QE by Vice Chairwoman Janet Yellen:
“[i]f the Committee were to judge that the recovery is unlikely to proceed at a satisfactory pace (for example, that the forecast entails little or no improvement in the labor market over the next few years), or that the downside risks to the outlook had become sufficiently great, or that inflation appeared to be in danger of declining notably below its 2 percent objective…”
It looks like all three criterions are close to being met, though not quite there yet. If Bernanke wants to stay ahead of the curve, it would make sense to announce some sort of intent to perform QE, at the next meeting (August I presume) if conditions continue to deteriorate.
If that’s the case, what will the new easing program be? .
What I think will happen is the fed may announce a perpetual easing program. By that, I mean the fed will announce it will purchase treasuries, MBS, etc. at a clip of $50 bln to $75 bln per month. This is known, as a “flow” of purchases and it will allow the fed to react flexibly to quickly changing economic events. It also does away with the idea of QE 3-4-5, etc. As Apple CEO Tim Cook said, iPad 20 doesn’t sound that great. I would almost think of QE, like the fed’s ability to move short-term interest rates, as just another tool in the box.
Trading wise, if that happens, I would buy gold and lots of it. That said, I always like to see what the stock market is doing heading into the Fed and currently it has rallied for four straight days. This tells me that Mr. Market is expecting some sort of QE announcement tomorrow.
While the stock market is saying QE, the fixed income market is pricing in a operation twist expansion/extension. If this is the Fed’s plan, I expect a large sell off in the stock market.