Hey folks, it's Karen, Head of Data Science at Stock Card. This week I used the COVID-19 Testing Kit and meshed it with one fundamental indicator and two technical indicators using the new Filter function on the Discover page, used to result to come up with stock on my Watchlist. Let me share with you how I went about this screening.
Steps to follow
Visit Stock Card's Discover page, and follow these steps:
If you are a Stock Card user (on our free Starter plan or premium plans), you can see the final results by clicking on this link. It is noteworthy that the results may vary day to day due to price changes in the stocks included in the collection. As of the closing on Friday, September 11, 10 stocks are included in the screening results. Click to view the results, or continue reading.
Using filter results
The overall market has been quite volatile since the indices (e.g., Nasdaq-100, S&P 500) peaked on September 2. In particular, the rally of tech stocks fueled by Softbank has receded, and cautious investors may be inclined to refrain from “buying the dip” in the FAANG and tech stocks resulting in drastic declines in some of Stock Card most popular stocks. What other stocks can investors consider to diversify their portfolios away from the technology sector? Investing in the stocks in the COVID-19 Testing Kit collection could be an excellent way to get exposure to the biotech and healthcare sectors and diversify one’s portfolio.
Let’s take Thermo Fisher Scientific Inc (NYSE: TMO), one of the ten stocks in the filtering results, as an example.
Add to watchlist
The chart below shows that TMO has outperformed the S&P 500 index throughout the year and is very close to the Nasdaq-100 (NDX) Year-to-Date returns daily based on returns. In the most recent pullback since Sept 3, as both S&P 500 and Nasdaq have been laggard, TMO has shown increasing strength, which is reflected in the daily returns. This may qualify TMO as a good addition to your watchlist.
The outbreak of Coronavirus has changed the way we live and work dramatically. The impact is not limited to people having masks on, and sitting 6 feet apart. The more prominent but less visible change is the transition of work from offices and commercial physical spaces to our homes. Working from home is not just limited to having a desk set-up, although that's certainly a necessity. The more critical enabler of the working-from-home era is digital infrastructure, such as a smoother log-in and access to the tools employees need to do their job. The more digital works become, the more significant is the need for easier online communications, document management, payment, and cybersecurity. Such a simultaneous and rapid shift to a new way of working has boosted companies' growth prospects associated with "work-from-home" products. At Stock Card, we live by the belief that our investment is a financial image of our lives, and it was only a matter of time before we completed our research to introduce a new list of companies that enable the work-from-home era.
Launching Stock Card's "Work-From-Home" collection
Last week, we introduced a collection called "Companies Shaping the Future." Many users told us that it helped them discover new growing companies to add to their portfolios. We hope the new "work-from-home" collection does the same. To build this list, we picked themes and markets associated with making "work-from-home" possible, less expensive, and more reliable. We have included companies from 40 different markets to create this new list. Some of these markets are:
You can click on the above links to see the individual market collections.
The above screening gave us a list of 450 companies as a starting point for your research. The best way to use this new collection is to look it up in the search bar, use the "advanced filters" to add your criteria and get a list of stocks that fit your investment goal. The video below shows you how, or click here to get the full list...
If you don't have a brokerage account to invest in Work-From-Home stocks, here is one of the best. We like the M1 Finance app that has an easy-to-use interface. Give it a try if you are in the market for a new brokerage account:
Risk-taking is an art! Not every risky stock is worth investing in. It's prevalent among stock market investors to justify a wrong decision as a risky one. However, a well-researched and informed risky decision can generate an outsized return and while being protected from total ruin. In this blog post, we explain a simple set of criteria we typically use to discover stocks worthy of your attention if you are a risk-taker. The list of Stocks for Risk-Takers can be a starting point for those who understand only some risks are worth taking.
Launching Stock Card's "Stocks For Risk-Takers" collection
We started the process by looking for smaller companies using the market capitalization of less than $10 billion. Doubling a $100 billion company is much harder than doubling a $2 billion company. Therefore, when it comes to risk-taking, small is more beautiful than big.
By just only one filter, the universe of publicly-traded stocks in the U.S. stock exchanges shrinks to a list of slightly a few more companies than 4,000.
Not every small-cap stock is worth your attention!
Finding noteworthy risky stocks is not just about searching for smaller companies. It would help if you also weed out those companies that cannot grow their revenue. Notice that we didn't talk about profitability. When companies are small and profitable, the chances are the stock market algorithms have already found them, and prices are adjusted to reflect the positive earnings. Therefore, stocks with growing revenue in the last 12 months to 3 years can narrow the list to a more manageable list.
If not profitable, then what?
While being profitable is good, being able to generate free cash flow is better. Earnings and profit are metrics heavily influenced by accounting principals. Highly profitable operations can become unprofitable if the management decides to reinvest the money it makes back into the company. However, a reliable, rapidly-growing company are typically cash flow positive before they are profitable.
The last criterion to consider is the company's ability to survive a period of economic hardship (such as the economic slowdown induced by the COVID-19 pandemic in 2020) or possible fluctuations and cyclicality in demand (such as demand cycles for chip technology). A reliable, risky company has enough cash to fund its operating expenses easily without the need to raise additional money or borrow.
The result of the above screening is a list of 189 reliable but risky stocks worthy of the attention of a risk-taker investor. We added them to Stock Card's collections, and you can access them for free by typing "Stocks for Risk Takers" in the search box on our website. Log in and check the list!
Without a doubt, the U.S. stock market has staged a historical “recovery rally” since late March, regardless of the drastic price drop mid-June. The S&P 500 index erased all its losses for the year as of June 8. The Nasdaq index hit an all-time high past the 10,000 level the following day. There are various conjectures about what has fueled the rally. Some associate it with a possible wave of FOMO by the so-called Robinhood bros. Others believe that the optimism about the reopening of the economy has driven the rally. Regardless of what the catalyst is, a prevailing sentiment in our private Facebook community recently has been caution. What are the available choices to investors as they navigate the V-shape recovery, so far, and another possible sharp decline moving forward? How does an investor protect her gains, without sitting on the sidelines to let the volatility subside?
In this blog post, Stock Card's Head of Data Science and a technical trader, Karen Sheng shares her thoughts and strategies that could be employed to address these questions, mainly using one general and three specific options strategies.
PART ONE: FOR ALL INVESTORS
Cash is also a position!
Cash is also a position - This is lingo that is commonly used in the traders' community. When a trader has low conviction about either direction of the market, one of the choices available is "going flat." This rule applies to investors who "buy and hold" as well. Doing nothing is a strategy worth considering, especially when there is doubt. Holding cash or selling to have cash come with a few important considerations:
This strategy is specifically important and easy-to-use by starter investors. However, for those willing to put the time and effort required to learn more sophisticated approaches, I'm sharing three possible hedge strategies using options. If you are a more advanced investor, read along.
Before sharing the more advanced hedging strategies, have you heard of Public, one of the easiest and best-looking brokerage apps out there?
PART TWO: FOR MORE ADVANCED INVESTORS
Protect long-term investments with three options strategies
Many investors use options as a "hedge" strategy. This strategy allows the investor to continue investing while having the fallback option to recover possible losses in case the market takes the reverse direction, as it has done so in mid-June. For the rest of this post, I will focus on hedging with various options strategies, all of which have defined maximum risk and risk/reward ratios. All these options strategies assume that you are willing to lose all the premium paid for the trade. Consider it a premium that you pay for insurance to protect your investments against a downturn of the market. If the market keeps rallying, your long-term investments are safe for the time being, and yet you may lose all the debit you have paid for hedging. On the other hand, in the case of a correction or crash, the gains from the hedging trade may offset the losses from the long-term investments. Compared to the "staying in cash" approach, you get to keep the stock holdings in your portfolio for long-term investments.
For illustration purposes, I'm going to use options of SPY for the reviews below. The prices of both stocks and options reflect close prices as of the end of June 9. Furthermore, I want to limit the premium paid to each trade, as this is the money that I'm committed to losing completely. In practice, I usually set the maximum in the range of $150-$250 per trade. For illustration purposes, though, I'm going to set the maximum at a much higher level, $1000, because I would like to compare the P&L for comparable Delta. I'm assuming that you have some basic understanding of the components of options pricing. With that, let's get to it!
Strategy one: A naked put option
Example one - Buy an ATM (at-the-money) put option with 10 DTE (days to expire): I added two screenshots to explain how you go about buying this put option. The screenshot on the left shows a portion of the option chains. The maximum loss of this trade is the debit I'd pay - $582 plus any commission. The screenshot on the right is the projected P&L as of June 9. Note that if SPY starts to consolidate around the 320 level and doesn't make a significant downward movement, by 7 DTE (4 days from June 9), the trade would start to turn into a loss.
Example two - Buy an ATM (at-the-money) put option with 31 DTE (days to expire): The debit required for this trade per contract is $931, as the extrinsic value (time value) has almost doubled relative to the 10 DTE ATM contract. Recall the time-decay chart shown above. The time decay in this 31 DTE trade does not accelerate as fast as in the 10 DTE trade. Again, this is the projected P&L as of June 9. Notably, it's a break-even trade (zero loss, zero profit) if SPY consolidates around the 320 level by 22 DTE (9 days from June 9). The additional premium I'd pay gives me more time to wait for a pullback of the market.
Strategy two: Construct theta-positive options trades
Theta-positive, in plain English, means that the passage of time works in our favor. I'm going to review two theta-positive strategies - put debit spread and put calendar spread.
Example - Buy a put debit spread with 10 DTE (days to expire): I'd buy the 320 SPY put option and, at the same time, sell the 315 SPY put option. The debit required for this trade is $186, and the risk/reward ratio is approximately 1:1.7. Note that the premium paid is significantly less than buying a naked put option. Furthermore, since the trade benefits from time decay, I don't mind placing a trade with fewer days to expiration.
Strategy three: Buy an OTM (out-of-the-money) put calendar spread
I hope you find these strategies and examples helpful. Don't forget the first thing I shared with you. Cash is a position too. You can always keep some money and only invest the money that will not endanger your financial well-being if you lose it all.
The COVID-19 pandemic has taken a toll on many sectors across the globe. The real estate sector is one of the hard-hit areas of the economy. As restaurants, bars, retail stores, and offices shut down around the world, landlords, property owners, and property management companies are going through an extended period of declining revenues. It is no surprise that the S&P 500 Global REIT index has fallen more than 30% since the middle of February 2020. In regular times, REITs (Real Estate Income Trusts) are some of the most popular types of securities investors hold for their abundant and reliable dividend income. However, the COVID-19 pandemic has caused many REITs' investors to question the reliability of investing in REITs. In this blog post, we share a list of reliable REITs worthy of attention despite the COVID-19 impact.
Aren't all REITs reliable?
When we published the COVID-19 investment resources, we discussed not every company can survive the COVID-19 pandemic. Those with ample cash and access to capital and manageable debt have the highest likelihood of going through the COVID-19 economic crisis and coming out of it ready to take off. The same logic applies to REITs. Not all REITs are worth your investment dollars. Some REITs have the operational strengths that can survive through the economy's cycles and keep rewarding the investors with a reliable source of income.
How to find Reliable REITs?
There are 335 REITs listed on the main U.S. stock exchanges. In the first step, we wanted to get rid of those with massive liabilities and debt. REITs with high-interest expenses compared to their earnings (EBIT) are the worrisome bunch. Companies with debt have to be able to cover the interest expense of their debt using their earnings. Just by using that as criteria, nearly two-thirds of REITs are out of the list. To make the search for reliable REITs even more precise, we applied a few additional filters:
Those criteria are pretty standard for evaluating companies with strong balance sheets. However, there is one data point that is particularly important for assessing REITs. For a non-REIT dividend-paying stock, typically, investors look at the stock's payout ratio. This ratio refers to the percentage of the company's earnings that is used to fund dividends. When such a rate goes above 70% to 80%, it is seen as a red flag. All companies need to reinvest a portion of their earnings to grow, and it's not an operationally savvy idea to borrow money to pay dividends. Therefore, the dividend payout ratio is an indicator of the sustainability of the dividend payment in the future. If a company uses almost all of its earnings to pay dividends, or worst, if it uses funds beyond its profits to fund its dividend payments, the sustainability of the dividend payment is questionable. The same logic applies to REITs. However, the usual payout ratio is not the right way of measuring the sustainability of a REIT's dividend.
Best Brokerage for Dividend Investors
REITs are one of the best dividend-paying investments. Especially if you choose to reinvest your dividend income back into your portfolio, gradually and steadily, you own more of the companies you have initially added to your portfolio. All you need to do is to sign up for a brokerage account that allows you to easily opt-in a dividend reinvestment option (a.k.a. DRIP). We like M1 Finance, particularly, for its easy ways of managing your account, including opting in a DRIP offer.
What is a FFO payout ratio?
Being in the business real estate, a REIT has a high depreciation cost. This cost is purely an accounting-driven number, and it is not an actual cash expense. Companies use depreciation to "expense" the initial capital they invest in acquiring the real estate over a few years. This accounting practice allows investment in real estate to be worthwhile by reducing the nominal earnings of the property or landowner and giving the owner significant savings in the amount of income tax that is calculated using the company's earnings. Because of this accounting practice, the earnings of a REIT are artificially (of course, legally) underestimated. Consequently, you cannot blame a REIT for having a high payout ratio and use it as a reason to skip investing in it. Instead, REIT investors look at FFO per share (Funds from Operations per share) and use that as a replacement for the earnings per share to calculate the company's payout ratio. Accordingly, we used the FFO payout ratio in our search for reliable REITs.
That adjustment in our screening process resulted in an additional 20 or so REITs that are reliable but would have been rejected if we used the standard calculations of the payout ratio.
Once we applied all the above-mentioned filters, the final results were a list of 32 REITs most likely reliable enough to go through the COVID-19 pandemic or any other economic crisis and come out of it without the need to cut their dividends.
The list is available to all Stock Card users on the Discover page using the "Reliable REITs" tag. You can access it by creating a free account on Stock Card.