There are more than 15,000 publicly-traded companies listed on the stock exchanges in the U.S. Even if we ignore smaller and volatile penny stocks and only focus on the three main exchanges, NYSE, NASDAQ, and OTCM (Over The Counter Markets), there are still more than 6,000 individual stocks every investor has to review and choose from. More experienced investors have already learned and come up with a process to narrow down their focus to only a small set of companies on their watchlist. However, if you are a new investor, facing more than 6,000 stocks feels confusing and overwhelming. Where does a new investor start from? And, what criteria should you use to find a starting list of companies to build a portfolio?
Launching Stock Card's "Stocks For Beginners" collection
When started the process, we asked our first-time users and investors what matters to them the most, and came up with four criteria to screen the universe of 15,000 publicly-traded companies for the gems that are worthy of the attention of a beginner investor:
The result of the above screening is a list of more than 64 stocks that you can easily access, play around, and build your own starter portfolio. There is no guarantee that these 64 stocks continue to grow and not lose value. After all, we are dealing with the stock market that fluctuates by nature. However, these 64 stocks give a starter investor a chance to create a portfolio with less risk and more stability. Have a look at the Stocks For Beginners collection today:
Karen Sheng, Head of Data Science at Stock Card, is the portfolio publisher of the Phoenix portfolio. She combines her technical trading skills with the "collection" functionality on Stock Card and gives us a sneak peek into her thought process that led to a new addition to her portfolio. Check it out!
On April 29th, the share price of Alphabet (Ticker: GOOG / GOOGL) went up almost 10% post-earnings. The reaction is primarily attributed to the positive outlook of Google Cloud and YouTube ads revenue. The COVID-19 pandemic has been a double-edged sword for the group of companies in the internet & social media advertising business. On the one hand, revenue from the travel & hospitality industries, as well as small businesses, have diminished. On the other hand, these platforms have seen the increased engagement of users as people have increasingly consumed digital content while being sheltered at home.
On the tailwind of this emerging trend, I would like to introduce the new addition to the Phoenix portfolio and demonstrate my thought process. A unique feature on Stock Card's "Discover" page is to filter stocks based on "collections." A collection is Stock Card's proprietary classification system framed in natural language. For instance, when a user starts typing the word "advertising" in the search bar, the engine screens the universe of publicly-traded companies for companies in the advertising space. See the above image for more details.
There are six stocks within the "social media advertising" collection. For this exercise, I would like to focus on stocks that are ex-China and have a share price that is under $50. That leaves us with three stocks – SNAP, PINS and TWTR. The following is snapshots of these stocks:
Next, let's move on to technical analysis. This is the set of technical indicators that I used to identify entries:
The combination of the technical indicators outlined above and the fundamental information visualization available on Stock Card enabled me to add a new stock to my Phoenix portfolio. Stock Card VIP users can log in to their premium accounts and get to know the latest picks. Make sure to follow the Phoenix portfolio by clicking on the bell icon on the top-right corner of the portfolio page to follow my new stock picks.
By the way, this is Karen, and I own all of the stocks included and will be added to the Phoenix portfolio. Also, Stock Card has a Disclousre policy.
Our very own Head of Data Science, Karen Sheng, is introducing the Phoenix portfolio on our Portfolio Store. Being a technical trader, Karen has a unique and different strategy for investing. Read along and follow her Phoenix picks by clicking on the bell icon on the top-right corner of her portfolio page.
The COVID-19 pandemic has disrupted our lives in an unprecedented manner - from where and how we communicate and work, to how we seek medical attention is drastically different compared to only a few months ago. In the world of investing, while some sectors such as travel and hospitality have become distressed, the demand for other products or services has grown drastically. The general public adapts to the new "normalcy," and so needs our investment approach. We started to put together and invest in a diversified portfolio in this context. Our CEO has already launched the COVID-19 portfolio that focuses on a group of stocks with strong fundamentals that are more resilient to the market correction caused by the outbreak of COVID-19. Her COVID-19 portfolio is mostly focused on the so-called "buy the dip" approach. The new Phoenix portfolio is more of a defensive play. Being a technical trader, I’m inclined to purchase stocks or get into bullish options trades when a stock has either recovered or maintained bullish momentum.
Use this portfolio to get a balanced view of possible approaches to benefiting from the COVID -19 opportunity. I have put my real-money in the stocks in the Phoenix portfolio to back my decisions. There are more stocks on my watchlist, and I am continually monitoring them, waiting for a pullback to identify opportunities for entries. Follow the Phoenix portfolio by clicking on the bell icon on the top-right corner of the portfolio page. Stock Card sends you an email automatically when I add a new stock to my collection of Phoenix stocks.
Why are investors pouring money back into the stock market, despite the grim economic status of the country? -- A member of Stock Card's private community
Questions similar to the above are flooding the investors' communities and online media. It seems that the stock market's movements, and investors are being quite irrational. While the answer to such questions is quite complex, there is a simple underlying logic that drives such seemingly irrational behavior. In this short blog post, we'd share the summary of the analysis we just completed at Stock Card HQ (the virtual HQ) to explain why investors are rushing back into the stock market, despite the grim state of the economy.
The seemingly irrational movement of the market
The three major stock market indices in the U.S. have lost between 25% to 30% of their value between February 18th and March 23rd. The decline wasn't surprising considering the effect of the COVID-19 on halting production and consumption globally. However, what the market has done after March 23rd is surprising to many people. Between March 23rd and April 16th, the same three indices have gained between 23% to 25% even though the economic activity hasn't resumed to the pre-COVID-19 levels. In the absence of economic recovery, it is puzzling to observers and commentators to see such a seemingly clear irrational behavior. Something has got to give.
What's going on here?
To solve the puzzle, let's discuss how people and algorithms make investment decisions. Making investment decisions is a probabilistic process by nature. You would invest more when there is a higher chance of a return, measured by the price you are paying for assets compared to their estimated value. If you pick up stocks at a better price compared to their fair valuations, you will win. Following such logic, investors and algorithms must believe that they can invest in the stock market at better prices now. Are they correct?
Let's look at the data! On the Stock Card platform and the Stock Card of each company, there is a specific section for the fair share price information. In this section, Stock Card automatically collects, aggregates, and visualizes the mathematical calculations that are commonly used to calculate the fair share price of a company. We use price to sales, price to earnings, price to free cash flow, and price to book value ratios, pull financial analysts' price target, use all that information to calculate companies' fair share prices, and compare them with the current prices. Those calculations show whether a stock is over or undervalued at its current market price.
Using the aggregated numbers for all available Stock Cards, we compared the distribution of undervalued and overvalued stocks between April 2020 and February 2020. The results are quite telling.
On Monday, April 13th, when we did the analysis, there were 6,743 companies on the Stock Card platform. Those are publicly traded companies listed on NYSE, NASDAQ, and OTC markets with a market cap of higher than $300 million. Among them, and as you can see in the above image, shares of only 2% of the listed companies were overvalued. When you compare that number with February of 2020, nearly 6% of the companies with a market cap of higher than $300 million, listed on NYSE, NASDAQ, and OTC markets, were overvalued. Simply, when investors and algorithms pour money back into the market, it is because they believe the odds of success are in their favor. Because of the price declines between Feb and March, the chances of throwing a random dart at the stock market board and hitting an overvalued stock is nearly three times (6% v.s. 2%) lower now compared to February of 2020.
Looking at the stock market movements with a lense of probabilistic decision-making is one of the best ways to understand why the stock market moves, albeit sometimes quite irrationally. In addition to the above analysis, the rush to invest back in the stock market is exacerbated by the fact that for almost 11 consecutive years, we were dealing with overpriced equities. During those 11 years, most investors were longing for the possibility of investing in anything at lower prices.
It's not surprising to see the rush back into the market when you peel the onion of the stock market to its primary governing logic. Assuming long-term success in the stock market is dependant on investing in well-managed companies at a fair price compared to their intrinsic value. Currently, the odds of success in the stock market is higher than what it was a few weeks ago. That's why money is being poured back into the market.
Waiting for the stock market to reach its bottom, before starting to invest, is a mythical pursuit.
Our fellow StockCardians, since the start of the COVID-19 market crash, everyone is looking for the bottom. Many investors are waiting on the side until the market hits bottom before they invest. Of course, finding the bottom is a logical and intellectually satisfying strategy. However, in practice, finding the precise day or week that the market reaches its bottom and starts its recovery is mostly a mythical pursuit. In this long-form blog post, we'd like to share our approach in dealing with the COVID-19 market crash. Moreover, we will discuss the ways Stock Card can help you to invest during the COVID-19 crash. As always, if you have questions and comments, ping us on Intercom on our website, or send us an email. Our email is firstname.lastname@example.org. Let's get to our guide to investing during COVID-19 ...
Is it time to buy?
A wise man once said, and another wise man recently reminded us that "When the Time Comes To Buy, You Won't Want To." Boy, oh boy, he was right. Nothing seems right when you are pressing the "buy" button amidst a market crash. It doesn't help either that everyone is screaming at you to stay away from the stock market. These days investing in the stock market feels very uncomfortable. Despite that, is it time to buy now?
The short answer is, probably yes, with a few considerations. However, the short answer doesn't help much. Let's get to the long answer and hash things out.
Making investment decisions is a probabilistic decision-making process by nature. You would invest less when the odds of gaining outsized returns are not in your favor, such as the entire 2019. In contrast, you get more aggressive when the odds of success are in your favor. My fellow Stockcardians, the odds of investment success are in your favor simply because the stock market is sprinkled with reasonably priced stocks.
We recognize the boldness of the statement we are making in this post. There is no guarantee that the stock prices will go up from here. And, a few years from now, with the benefit of hindsight, we may see that investing now wasn't the best choice, and we could have waited for a few more months and gotten even better deals. But, we don't have a crystal ball that can show us the future, neither does anyone else. All we can see now is a stock market full of undervalued stocks that we would have invested in them even at 20% to 30% higher prices had COVID-19 hadn't happened. Regardless of whether the prices will continue to fall or not, the odds of success are in your favor if you invest at fair prices.
Why are the odds of investment success higher now?
As you know, on the Stock Card platform, we automatically collect, aggregate, and visualize the mathematical calculations that are commonly used to calculate the fair share price of a company. We use price to sales, price to earnings, price to free cash flow, and price to book value ratios, pull financial analysts' price target, use all that information to calculate companies' fair share prices, and compare them with the current prices. Those calculations show whether a stock is over or undervalued at its current market price.
On Monday, April 13th, there were 6,743 companies on the Stock Card platform. Those are publicly traded companies listed on NYSE, NASDAQ, and OTC markets with a market cap of higher than $300 million. Among them, and as you can see in the below image, shares of only 2% of the listed companies were overvalued. It gets even more impressive when you compare that number to February of 2020 when nearly 6% of the companies with a market cap of higher than $300 million, listed on NYSE, NASDAQ, and OTC markets, were overvalued. When we say the odds of success are in your favor, it's because the chances that you throw a random dart at the stock market board and hit an overvalued stock was nearly three times (6% over 2%) higher back in February of 2020, compared to April 2020. Imagine how much higher the odds of success would be if you take a meticulous look at each company and make an informed decision as to whether or not to invest in it.
Isn't it better to wait and see whether the market falls further?
Similar to every investor out there, we'd love to invest precisely on the day that the market hit bottom. Wait ... wait ... wait ... the bottom has arrived, buy ... buy ... buy ... What a brilliant strategy, except that we don't know where and when the bottom is. If we've learned anything from the preceding 11-year bull market, we know that market forecasts are almost always wrong. We can compare the market's movement with the historical crashes all day and night and try to predict where in the cycle we are, but it wouldn't give us any more concrete answers than an informed guess. While all market crashes recover, eventually, there is no telling where we are in the cycle because every market crash happens in a different economic context.
As an example, during the market crash of 2007-2009, it took the government nearly one year to come up with the $787 billion stimulus package to end the recession. The stock market started a slow descent in October 2007, with a big crash in September 2008, and the stimulus package came through only in February 2009. During the COVID-19 crash, the stock market started its descent late February 2020, and in less than two months, the stimulus cheques and loans have begun to flow through the economy. The context has changed so much, not sure for the better or worst, but a direct comparison between this market crash and any other market crashes in history is only directional correct and lacks context. And, timing the sequence of the market's movement is nearly impossible.
How to invest in the stock market now?
Knowing all that, how should we all invest in this period of heightened uncertainties? COVID-19's most dire impact on the economy is its unique speed. In a matter of one quarter, the demand for some sectors of the economy has fallen to nearly zero. Take airlines as an example. Compared to last year, the number of travelers going through airport TSA has fallen by 97%. Therefore, the source of immediate revenue for airlines has dried down. The situation is no better for restaurant, entertainment, or retail industries. The impact is not as drastic in other industries and sectors. However, a 20% to 30% decline in the revenue of a payment processor and credit company is not unreasonable. It's a no brainer to screen your investment universe for companies with enough cash on their balance sheet to compensate for the lack of revenue without the need to borrow money to fund the day-to-day operations. Focusing on companies with a strong balance sheet would drastically increase the odds of success in the COVID-19 era.
We built Stock Card to make your stock market research simpler, faster, and more fun.
Rules of the investment game during COVID-19
Before we wrap-up, let talk about the rule of the investment game during COVID-19. The rules are not specific to the COVID-19 market crash. However, they become even more important during a market crash. These are the fundamental rules that at Stock Card we don't cross. It is paramount to our success to draw the lines and not cross them at any cost.
Here are the seven commands of COVID-19 investing to make sure the odds of success stay in your favor:
Without a doubt, COVID-19 has brought dismay and sadness to millions of people globally. People have lost their lives, loved ones, and their jobs. One the one hand, COVID-19 has been a disastrous situation for many people. However, there is another side to the coin. COVID-19 can also be an opportunity, especially for stock market investors.
Warren Buffett once said, he has been lucky to go through a handful of stock market crashes. The COVID-19 market crash can be your lucky opportunity to build your wealth. At Stock Card, we agree that investing at the bottom of the market crash is an excellent idea. However, we don't believe there is a way to predict the bottom. That's why we focus on investing in well-managed companies, with strong balance sheets, at fair stock prices, and we do so as often as we can. The chances are that one of those investments would land at the bottom. That would be a fantastic coincidence. However, most of our decisions will occur during other times but the bottom, and that's okay with us. As long as we take the most advantage of the fair stock prices while adhering and accepting the rules of the game (see the previous section), we feel lucky to be an investor during the COVID-19 market crash. We hope you do so too!
Your Stock Card Team