Stock Picking Is Heating Up, So Focus On Speculation

Stock market fragmentation is gaining strength and speed, producing widening gains for selected stocks. With investors and the media starting to take notice, a trend is shaping up. So, now is the time to focus on active stock speculation. Coronavirus or not, the potential is here for making gains quickly.

But isn’t that a sign that the overvalued stock market is about to fall?

No. The “market” is now an anomalous hodgepodge of companies, ranging from suffering and shrinking to innovating and growing. Moreover, many previously established companies now have uncertain futures, and their stock valuations are indeterminable.

Thus, we are seeing the beginning of an investor shift from mired down companies (and market index funds that necessarily hold such companies) to promising stocks (and actively managed stock funds that are free to choose). The latter, positioned for future growth and profitability, will be the winners.

Additionally, as those winners prove their mettle with outsized gains, the shift will gain popularity and momentum. A good example is the late-1999/early-2000 shift from “old economy” to “new economy” stocks. In fact, that same dynamic could be at work this time as “pre-coronavirus” winners give way to the “post-coronavirus” leaders.

Well, that previous time ended in a bust, so won’t that happen this time, too?

It could, but not yet. All stock environments that cycle to a favored approach can run too high, creating a bubble that eventually pops. However, we are far from that point.

Remember that when a top occurs, very few investors will sense that the run is over. In fact, at that point, there is near absolute confidence that the trend is far from ending. Optimism is very high with expectations of favored stocks being low risk and offering sure gains (AKA “easy money”). At such times, the absence of negative comments and outlooks becomes the danger indicator to look out for.

Clearly, that description is far from today’s conditions, feelings and forecasts.

So, how do I find promising, speculative stocks?

Four popular investor approaches are:

1. Identify and invest in one or more actively-managed funds
2. Identify and invest with an adviser skilled in stock picking
3. Identify and use one or more advisory services (AKA investment newsletters) to identify speculative investments
4. DIY – Do it yourself

Do it myself?

Yes. DIY has significant ancillary benefits: education, experience and “excitement.” The current market environment, coronavirus and all, means those benefits will accrue at a rapid pace.

But what if I fail or just don’t like doing it?

Then you will have succeeded in learning that you should use a fund or adviser to handle your investing decisions. (The alternative is not learning, then getting drawn into the fantasy melee at the top – just in time to get caught in the reversal.)

Moreover, you will have gained an education and the experience to better understand what investment managers must contend with. In turn, that knowledge will help you better select and work with a manager.

A case example of a stock-picking approach

In the mid-1960s, I happened onto an approach that fit both my aptitude and personality: Looking for stocks that were making new all-time highs. My rationale? A stock trading in new high territory has no upside barriers and every shareholder has a profit. (I continue to use this approach today.)

However, many all-time high stocks are not attractive buys. In fact, in the extended period of passive index investing, most stocks have drifted up with fund inflows, meaning there were no special developments underlying their all-time high breakthroughs. Therefore, in addition to the upward move, itself, there needs to be a sense that the company’s positioning is “better than ever” with a bright future.

An example in today’s market is NVIDIA NVDA , which made an all-time high breakout in mid-May. In the graphs below, note its previous highs were set at the beginning of the 4th quarter 2018 bear market and just prior to the 2020 coronavirus selloff (meaning the peaks were market related and not caused by the company running into problems). The mid-May breakout and current rise is being accompanied by positive company views and outlooks. As proof, note the widening performance gap between NVIDIA and Intel INTC .

Disclosure: Author holds NVIDIA

NVIDIA shows not only how investor outlooks are changing but also how quickly good stock selection can reward a speculator in this market.

Weekly graph from January 2018

Daily graph year-to-date

The bottom line: This stock market is excellent for stock-picking speculation

Now is the time to break away from the “lessons” of the past decade. Focus on active stock-picking and move away from passive index-matching.

This environment is perfect for making this shift, with high uncertainty hammering many well-known companies. Innovative, agile companies on a mission can overwhelm even former, established leaders.

Moreover, investing with the dramatic, speedy changes afoot provides an excellent learning experience.