Investing Methods for 2018
How to Start the Year with a Plan
Buy the Dip (Quality Companies)
If you believe the market is going to grind higher, it is important to consider following this method of trading. Throughout 2017, there has been a series of short-lived rotations out of different sectors. An example of this can be seen in the recent rotation out of technology, and into retail and oil. This rotation has resulted in your favorite technology stocks having lower prices. Another way stock prices can severely decrease is through earnings misses or analysts not liking a company's guidance. For these reasons, I choose not to participate in earning season buying. When purchasing a stock before its earnings, it’s like gambling, since your hoping it will beat earnings and analyst’s expectations. A company will have to do this in order for investors not to take profits on the news. In order to best implement this method, I would recommend buying half the number of shares you want to own when the stock drops a severe amount. Once the investment is made, the next trading days and maybe weeks are essential as you are able to most effectively add to your position. One of the best things about this strategy, is if the price suddenly goes up before you add in, you are still able to make money. In contrast, if the price goes down, you will still have the funds to add to your position and lower your average price. The most important thing is to believe in the stock and your investment, and if you do, you will be incredibly grateful for such a cheap price. This is likely going to be a great opportunity, as the market has immense potential to grind higher for this upcoming year. The key is to buy quality companies that still have great fundamentals and are solely a victim to the rotation.
Dog of the Dow
The Dow Jones Industrial Average is made up of the largest 30 companies traded on the New York Stock Exchange and NASDAQ. The “Dog of the Dow” theory popularized by Michael O’Higgins, states that on the last trading day of the year, the top ten highest dividend companies in the Dow Jones Industrial Average are calculated. Similarly, on the first day of trading for the new year, one should invest an equal amount of money into each selected company. At the end of the year, all the stocks that don’t make the new year’s dog list should be sold, and all the money should be reallocated to the new set of dogs ten highest dividend companies in the DJIA). However, there are different variations of this method such as following the same process but selecting fewer companies, like four or five. This method is beneficial for all investors to implement. In contrast, young investors have the opportunity to be riskier in their investment approaches.
Growth investing mostly recommended for long-term investors. Growth investors analyze the future potential of companies. These stocks have high betas. For example, some growth stocks would be Nvidia, Alibaba, and Amazon. These stocks won’t give out much of a dividend, but the stock price should make up for it. In order for growth companies to acquire the most potential for future growth, they choose to reinvest their money into new technologies. Every quarter, companies release their earnings reports and if they beat earnings, a giant move in price will be able to be seen. It is important to keep into account a company’s past earnings. If there is no news showing struggles in sales, and the economy is strong with a weak dollar, earnings should continue to be strong. The company’s guidance is another key metric growth investors look at carefully. This information is instrumental in determining which companies in the sector can be successful among its peers. Some other factors to keep in mind include: profit margin and return on equity. A rule of thumb would be, if you don’t see your stock doubling within a reasonable amount of time, it would not be able to be classified as a growth stock.
Corporate Tax Reform (Appropriating funds)
Corporate tax reform is going to be a major factor in investing for 2018. As a result of massive tax cuts, companies including: Amazon, Google, and Facebook will save billions of dollars in taxes. The tax cut will result in another major opportunity for companies, which is to repatriate the money from overseas accounts back into America. For example, Apple currently has approximately $223 billion dollars in overseas accounts. This is done to mainly to avoid their 25.8 percent effective tax rate, which in the new tax bill will be decreased. Different companies will have various tax rates based on the new plan. The effective tax rates for each company will be released around their first earnings report of 2018. With this cash, companies can: increase their buybacks and dividends, invest more into their own company to keep innovating, make acquisitions, and pay off any debt they may have acquired.
Key Events (Biotech conference, E3, Blockchain & Cryptocurrency Con 2018
Conferences have an extreme impact on individual stocks. One reflection of the technology sector is E3, one of the biggest video game conferences in the world, with more than 50,000 in attendance last year. Happening in June every year, video game stocks as well as stocks in the technology sector are greatly impacted. For example, semi-conductors, video game publishers, console makers, and virtual reality companies are all intertwined. From an investing mindset, you should look for new innovative products, crowd reception, and new exciting announcements.
Biotech conferences are where big announcements of clinical trials and new drugs are released. One of the bigger conferences is the American Society of Hematologists Meeting in December. Bluebird Bio ($Blue) has a history of having drastic moves based on when this conference is held. This year after the conference was held, there was a 30-point move to the upside. Like all conferences, there are winners and losers. It is important to recognize the winners for the future of these company’s pipelines.
The year of cryptocurrencies could be 2018. It is important to view the conventions that cover blockchain technology and cryptocurrencies. With several upcoming events in London, Miami, and California, if you gather the information from these conferences and invest your money into the promising coins, the gains can be enormous.