We start with the universe of potential investment opportunities. When tradings stocks, ETFs, and Options, we are concerned with liquidity, quality of management, transparency, the predictability of financial performance and relative stability of price behavior. As a result, we typically focus on large capitalization stocks. Large and mega cap stocks are typically members of the S&P 500 and/or the NASDAQ 100. This gives us a universe of just under 600 different companies to examine, spread out among all the important industries within the economy. In addition to stocks, we look at some of the important commodities like oil, gas and the precious metals from time to time and ETFs as well.
Every potential investment opportunity we consider are categorized based on their trading pattern (e.g. trending, changing direction or moving without trend). This is an exercise very few fundamental investors do, but one we think is vitally important. There is information we can extract by examining how an asset is trading. It tells us what other investors are doing and thinking. It is impossible to know everything about every company in your investible universe. One fact we have learned over the years is that there is always someone who knows more about a company than you do. These folks will buy and sell the shares accordingly and you want to make sure your actions are in sync with theirs.
Within each of these categories, every asset undergoes an automated valuation analysis and given a valuation rank. Stocks withing an uptrend with a low valuation metrics are ranked highest. Those with expensive valuation metrics are ranked lowest. The opposite ranking takes place for stocks that are in downtrends. The value analysis is combined with the technical and Sentiment Analysis to reveal a hand full of the promising ideas. We then do a deeper fundamental analysis and news search to build or deny our investment thesis for a short list of stocks.
We then build a trade around that idea. Only those opportunities where all the indicators point in the same direction make the final cut. We generate ideas one at a time and without knowledge of our reader’s portfolio. It is up to them to do their homework to see if they agree with our thesis and to determine if the idea fits their portfolio and personal risk tolerance. How the reader chooses to take a position is dependent on their style, knowledge and risk tolerances. If we are bullish on a particular idea, we suggest investors buy the stock or ETF if, after they do their homework, they agree with the thesis and two it helps diversify their portfolio. Some investors prefer to use options to express an investment idea. For those subscribers, we suggest an options structure that matches the type of price move we expect from the asset.