Headlines are constantly vying for your attention but when putting hard-earned money at risk in an investment, you want some substance to the story. That long has been a selling point to The New America feature in Investor’s Business Daily, and 2017 provided a good reason why.
X The names highlighted in The New America this past year had stellar performances as a whole. In an IBD index based on the New America names, the 2017 performance was 30.4% versus 19.4% for the S&P 500. The index assumes a holding period for a stock is six months from its publication in the feature.
How is that accomplished? By applying a key tenet of IBD’s investing philosophy: It’s just not fundamental or technical analysis, it’s both.
The technical analyses often seem to garner a disproportionate amount of real estate with stock prices, chart scrutiny and discussions of base patterns.
However, the elements of what the company does, its earnings growth, balance sheets, and income statements are often more important in your stock selection.
Looking At The Ratings
Ratings such as the Earnings Per Share Rating and Sales/Margins/Return on Equity Rating give you a good starting point in stock screening, but the New America dives deeper to get behind the numbers.
What are the opportunities for future earnings growth? What is the competition like? How do customers, management and analysts view the company? Understanding the details of the company gives you a leg up on playing the stock for a profit.
The New America selection isn’t based on fundamentals alone. In keeping with the IBD principles, companies selected also need to display technical strength.
Relative strength, signs of institutional sponsorship and developing chart patterns inform the selection process. The technical selection process helps weed out weaker stocks and gives readers a more focused list of names that could be actionable soon. The combination is critical.
The 57% advantage the New America Index has over the S&P 500 may seem rewarding by itself but that’s really just a starting point. Chart reading and portfolio management principles applied to the names can significantly improve those results.
Charts help with the timing of your buys and sells but the fundamentals guide you on what to buy in the first place and which stocks might be worth holding for larger gains.
Planet Fitness’ Delayed Breakout
Take Planet Fitness (PLNT), featured on Feb. 13. A flat base was in the process of forming at the time and The New America put the stock on investors’ radar prior to a breakout. A savvy investor wouldn’t have made the purchase at that time, because it didn’t break out until three months later on May 25. That was after a new base formed and offered an even lower entry opportunity.
Planet Fitness exited the New America Index six months after its entry, in the middle of August. Here again, an investor using charts and portfolio management rules would most likely view the new flat base as another buying opportunity rather than a time to sell.
The 13% gain Planet Fitness contributed to the New America index over six months could have easily turned into a 63% gain over seven months. The improvement was simply by delaying the entry until a breakout and holding until the end of the year since the stock never triggered any sell rules.
The New America is just one element to your stock research process. Once you understand the company, you should also look at a chart to see where the stock is trading.
Is it basing in a sound pattern? Is it extended and needing time to consolidate gains? No matter how great the company story is, it doesn’t guarantee the stock will go up in price. Charts act as a critical supplement to the information gleaned from the article.
One That Didn’t Make It
That was the case with Macom Technology Solutions (MTSI) in July. The stock broke out in May and pulled back after making gains of 20%. At the time of the article, the best course of action would be to wait for a consolidation or a bounce off the 10-week line.
Neither happened for Macom. A 25% drop after an earnings report ruined the look of the chart. While the New America Index suffered the loss, anyone looking at a chart would have avoided the stock.
The New America acts as both an idea generator and a research tool. Maybe you recognize a compelling chart pattern as you’re scanning the names in the IBD 50 list. Before just buying a stock based on the chart, you can do a deeper dive to understand the company’s prospects.
The company most likely won’t be featured in The New America that day, but you can view the archives to see the most recent articles and filter by feature. Sometimes, the extra knowledge of what the company does can be a deciding factor of whether this will be a stock to hold for a larger gain.
The story behind Alibaba (BABA) was certainly compelling when featured in the last quarter of 2016. Alibaba was in the process of forming a cup with handle at the time. But, when it broke out in March it quickly turned into one of the biggest leaders of 2017 with a gain over 80% from the breakout.
The New America won’t make the buy decisions for you, but it can certainly give you the tools to make informed decisions for yourself.