Quality Stock Picking Wins in the End – March 31, 2023
There’s an old saying on Wall Street, Bears make headlines, bulls make money.
It’s true. Fear-driven headlines can easily get investors off course.
Ultimately, quality stock picking wins in the end.
I’m fortunate to have lived through a handful of market pullbacks: the Global Financial Crisis, Taper Tantrum, COVID-19, and more. Let’s go ahead and add the latest bear-fueled worry: the banking crisis.
Now, I can’t minimize these episodes, as they are and were real concerns. However, the market tends to sort setbacks out eventually. Bear markets don’t last forever.
Betting on great businesses has been a winning recipe over the long-term.
Today, we’ll dive into the latest data and size up the current supply and demand narrative. Sellers have been in control for well over a month, but that’s only half the story. One group of stocks has been under healthy accumulation: High-quality growth.
Many of our best performing stocks over the years are in demand. I’ll showcase one example company, and how our data-driven process highlights these outliers.
First, let’s check in on the data landscape.
Heavy Stock Selling Has Slowed
Since early February, outflows have ruled our data. We noted heavy overhead supply was weighing on stocks. The wave of selling dropped our Big Money Index (BMI) from overbought to nearly oversold levels in a few short weeks.
While we didn’t hit the oversold threshold of 25%, we did break 30%. Interestingly, the latest lift in markets has lifted the BMI ever so slightly:
Diving under the hood, we can see how the recent gains aren’t due to heavy buying, rather it’s from a slowdown in selling. When selling drops, stocks pop:
All things being equal, this is constructive action. This doesn’t mean it’s an all-clear signal. It simply indicates that the latest banking crisis worry has made progress.
While stories of bank runs and high interest rates gripped the TV screens, under the surface of the market there’ve been green shoots. Select Technology and Discretionary stocks have been under accumulation.
Quality Stock Picking Wins in the End
Our quantitative process is all about cutting through the noise and isolating what drives stock prices: supply and demand. We rank and score thousands of equities looking at fundamental qualities like sales growth, earnings growth, and more.
What we’ve found is simple: Great companies tend to grow earnings year after year, and stock prices reflect those earnings. Top performing companies have stocks that are consistently in demand.
So, where has the demand been? Technology and Discretionary names reign supreme in 2023. A great way to see that is via our sector ranking chart.
High MAP Scores reflect not only demand for the groups, but also the overall health. Each week for subscribers we display a Top 20 list ranking the highest scoring stocks under accumulation. These are the best of the best.
Unsurprisingly, 9 of the top 10 most bought names in Q1 were in the Tech and Discretionary space. Sifting through the market carnage reveals bright spots.
One great example is Arista Networks (ANET). With a MAP Score of 91, the company has been firing on all cylinders technically and fundamentally. Below shows that the stock was a Top 20 stock 4 times YTD:
Each blue bar encompasses healthy fundamentals alongside heavy accumulation. A quick look at the sales and earnings trends paints a quality picture. The company sports 3-year sales growth rate of 24% and 3-year EPS growth rate of 22%:
These are rock-solid numbers that easily attract institutional demand.
If you zoom out, you’ll see that the inflows have been constant in this name for many years. Since 2015, ANET has made our Top 20 list an incredible 59 times. Data is powerful:
This chart highlights how quality stock picking wins in the end. Market pullbacks will come and go, but as investors we should keep turning over as many stones as possible.
Data helps reveal the winners.
Let’s wrap up.
Here’s the bottom line: The recent drawdown in stocks has slowed. Green shoots can be seen in high-quality growth as they are under accumulation. One great example stock in our research is Arista Networks.
Focusing on sales and earnings growth has been a winning recipe for years…and even in today’s tough market conditions. There is a rush to quality in 2023.
Over the long-run, investing is all about finding the best businesses and holding.
Bears make the biggest headlines. Bulls make the money.
Author: Lucas Downey