Over the years, most of my big winners have been true growth stocks that possessed a handful of fundamental and chart characteristics: Revolutionary new products that are changing the way we work or live, triple-digit sales growth, rapid earnings growth, uptrending stock and so on. But a few of them have been something I like to call Bull Market Stocks. More on those in a bit.
Really, growth stocks are my bread and butter; they’re what I spend most of my time researching, and they have accounted for most of my big winners during the past decade.
In the 10-stock portfolio of Cabot Growth Investor, I aim for eight or nine of the stocks to be these kinds of growth leaders—maybe five or six of them liquid (well-traded and sponsored) leaders, with a couple of fastballs (smaller stocks with big ideas but also more risk).
What about the final slot or two? For those, I often look outside the so-called traditional growth sectors to provide the portfolio with a little balance.
For instance, bullish, leveraged exchange traded funds (ETFs) that track a major index have worked well. Cabot Growth Investor subscribers have bought the ProShares Ultra S&P 500 Fund (SSO) since April 2016, when our long-term market timing indicators turned positive. It’s been a relatively low-stress way to crank out solid profits during the bull market trend.
As for individual stocks, one of my favorite areas to look for winners outside of the traditional growth areas is in Bull Market Stocks - companies that directly benefit from a rising market such as exchanges, brokerages or advisories. Over the years, I’ve scored lots of winners with stocks like Tradestation (way back in 2003), Nasdaq Stock Market when it came public in 2005, IntercontinentalExchange (ICE) in 2006-2007, and Options Express. And before I got here, Cabot also won big with Charles Schwab (SCHW) during the internet bubble.
In most cases, Bull Market Stocks are good bets to see their sales and earnings accelerate as more and more investors get into the market.
Invest in these Bull Market Stocks
In the current environment, I think it’s still early for this group because money flows into U.S. equity funds have been so tame. Joe Public hasn’t yet embraced the bull market (a good sign there’s more upside in store), but odds are that eventually he will, which will result in more trading, more assets under management and higher profits.
A side benefit is that bull markets are often accompanied by rising interest rates, which usually boosts these firms’ income on their huge cash balances and money market funds, etc.
After lagging for much of this year, I’m now seeing more strength among Bull Market Stocks.
On the slow and steady side is T. Rowe Price (TROW), which is reasonably valued (15 times this year’s earnings), is expected to grow its bottom line 26% this year, pays a nice dividend (2.8%) and whose stock broke out from a base four weeks ago and has continued to march higher since.
There’s also Ameriprise Financial (AMP), a giant financial outfit with more than $800 billion in client assets under management that offers wealth and asset management, insurance, annuities and more. After a slow 2016, earnings are expected to rise 33% this year, and the recently released second-quarter reported catapulted the stock out of a two-year base! It’s not going to double in a few months, but AMP could be a solid winner going forward.
Or you could lean toward a firm like E*Trade (ETFC), which is part brokerage house and part bank. In the second quarter, commissions and related fees made up 38% of revenues, while interest income off customer balances, which have gone up along with short-term interest rates this year, made up 62% of the total. Profit margins (23.9%!) are very high, and the rising stock market is starting to impact trading activity, with April and May customer trades up 23% and 42% (respectively) from the year-ago periods.
E*Trade’s revenue growth overall is now accelerating (15%, 17% and 21% over the past three quarters), and that’s despite the commission price cut that the firm (and all of its industry peers) implemented earlier this year. Analysts see earnings up 21% this year, which could prove conservative. And the stock popped to new highs two weeks ago and has chilled out since.
Whether it’s TROW, AMP, ETFC or others, there’s a good chance a few Bull Market Stocks will put on good shows in the months ahead as more investors put money in the market. If you don’t own any, now’s a good time to consider one of them.