My companion and I crouched expectantly, gloved hands grasping our freezing weapons. The dawn light swelled slowly outside our icy bunker.
Then we heard them … at first faintly, then louder by the second … our quarry.
A huge V-formation slowly emerged over the tree-line. The noise from each individual flyer blended into a roar that echoed across the frozen swamp before us.
Suddenly, a cluster broke away from the pack and wheeled down straight for us.
We sprang into action, keeping up a furious rate of fire. POOM! P-POOM-POOM! POOM-P-P-POOM!
Down crashed four of the flyers, riddled with lead. Victory!
No, I didn’t man an antiaircraft battery in WWII. I hunted Canada geese as a kid.
One of my buddies was an expert with a goose call. He could attract them straight into our arc of fire.
I’m back “home” in the Chesapeake region this week. Hearing the familiar POOM of shotguns in the early morning reminded me that waterfowling is a great metaphor for investing…
Hunting for the Winners
For example, I recently got an email from a Bauman Letter subscriber who owns more than 250 individual stocks. Talk about a “flock” of stocks … that’s half as many as the entire S&P 500 Index.
He wanted to know how to whittle them down to a reasonable number. That means identifying the winners and culling the losers.
Now, picking winning stocks seems complicated. But, like calling down Canada geese with a little wooden tube and shooting them out of the sky, it just takes practice … and patience.
Here’s how I do it:
- Step 1: Identify the fastest-growing economic sectors. For example, until the second half of 2019, the global semiconductor industry was in a slump. But as soon as we saw signs of a turnaround, Clint Lee and I added chip companies to The Bauman Letter and Alpha Stock Alert portfolios heading into 2020.
- Step 2: Find the best of the best in the target sectors. This means finding the companies with the strongest projected revenue and earnings growth in their peer group. Continuing our example from above, we looked for companies that supply other companies that make products with strong future demand, such as new-model Apple iPhones and 5G wireless infrastructure. You can read more about how we do that here.
- Step 3: Get the timing right. In waterfowling, the trick is to time the flight of your target and squeeze the trigger at the precise moment. Too early or too late, and no goose for supper. The same goes for stocks. We bought semiconductors not at their absolute bottom, but just after they demonstrated a sustained uptick, confirming the trend we wanted to ride. And as long as the market is pushing up their moving average share price up over time, we hang on to them.
Put it all together, and a successful “stock hunt” looks like this, with the VanEck Vectors Semiconductor ETF (Nasdaq: SMH) serving as our model:
Note that despite the tempting peak in July (blue line), we didn’t pull the trigger until mid-August. That’s when the price trend confirmed a looming upswing.
Since then, semiconductors have broken away from the S&P 500 (red line) and delivered outstanding gains. We captured about 10% more of them by waiting until the precise moment to buy.
3 Sectors for 2020
Today I hunt for winning stock picks, not waterfowl. Here are three sectors and associated exchange-traded funds (ETFs) I’m targeting for 2020:
- Semiconductors: This is going to be a banner year, as the commodity cycle turns and chip manufacturers grow earnings. I like the VanEck Vectors Semiconductor ETF (Nasdaq: SMH).
- Cybersecurity: U.S. corporations are finally waking up to the need to invest in serious defense against hacking. On Monday, the Justice Department charged four members of China’s People’s Liberation Army in connection with the 2017 Equifax hack, one of the largest data breaches in U.S. history. That tells me the ETFMG Prime Cyber Security ETF (NYSE: HACK) could be a winner this year.
- Housing: The backlog of younger households that want to buy a home is at an all-time high. And I predict that in an election year, the federal and many state governments will intervene to encourage new construction, mainly of cheaper multifamily units. Buy the SPDR S&P Homebuilders ETF (NYSE: XHB) to position yourself for that.
Of course, index funds like these ETFs will get you the average gains from these strengthening trends.
But to get the very top picks, you need to pull out your “hunting gear” and go after the best companies in each and buy them at just the right moment.
Or you can put your feet up and let an experienced hunter — yours truly — do it for you via The Bauman Letter!
Editor, The Bauman Letter