This article is by Alpesh Patel OBE
Business owners should make good investors. After all they understand financials and business. Let’s take that approach to investing in the US in light of the election vaccine hopes. All this against a backdrop of IMF projections of UK GDP growth in 2021 of 4% and the US of 4.7% – some of the highest post-war levels.
“US Stocks hit new record after Moderna vaccine data”
“European stocks close higher on hopes of an effective Covid-19 vaccine”
These are just some of the headlines which followed “Rallying US markets set to stall as election drags on.”
The market seems to be over the US election and very much focused on the vaccine. But what does Biden mean for stocks, especially as more vaccines are being created?
Being an asset manager, but previously a columnist on investing for the Financial Times and presenter for Bloomberg TV, I know not to gamble around news. And business owners should know short term news is no reason to make long term investments.
So I will caution against buying healthcare stocks in the belief Biden will expand Obama-care. Or into solar companies because of the belief he will spend billions on clean energy.
A Simple Experiment
To find the top stocks to rally with a vaccine and under Biden I have used the following hypothesis:
• We should look for companies which before the pandemic were not in a decline. After all, even after the pandemic they would otherwise still fall.
• They should be companies which rose in the year before the market peaked ie upto 21st February 2020, because that’s when the lockdown began (UK) and stocks fell for 4 weeks.
• They should be companies which fell during the month 21st February to 21st March 2020. That is they were impacted.
• They over the past 6 months have not recovered. Again, if they had, then there is no gain to be had.
• They should be otherwise healthy companies. We do not want ones on the brink of bankruptcy, since the vaccine implementation may seen them collapse. So for these companies I would look for ones with high Altman scores and good CROCI scores.
• Of course we want ones that have started rising now after the vaccine has been announced which coincided with a Biden victory.
Introducing the Altman Score and CROCI
Business owners may know about Altman – they should if they do not.
As wiki puts it “The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman, who was, at the time, an Assistant Professor of Finance at New York University.
“The formula may be used to predict the probability that a firm will go into bankruptcy within two years. Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial distress status of companies in academic studies.
“The Z-score uses multiple corporate income and balance sheet values to measure the financial health of a company.”
CROCI is something business owners are less likely to know. It was invented by Deutsche Bank and used by Goldman Sachs Asset Management to pick stocks for its wealthy clients. This is a measure of cash flow.
Again wiki puts it this way: “Cash return on capital invested (CROCI) is an advanced measure of corporate profitability, originally developed by Deutsche Bank‘s equity research department in 1996 (it now sits within DWS Group).
“This measure compares a post-tax, pre-interest cash flow to the gross level of capital invested and is a useful measure of a company’s ability to generate cash returns on its investments.”
So which companies stand out in the US for me? Here’s your starter for 10.
HP – the computer company.
Up 36% in the past 6 months. You can ex post facto rationalise this. But I won’t. It’s a common investor error. Better to go by the factors I mentioned already of valuation, cash flow, performance.
Robert Half International is up nearly 50% in the past 6 months.
It is a global human resource consulting firm based in Menlo Park, California founded in 1948. It is a member of the S&P 500, and is credited as being the world’s first and largest accounting and finance staffing firm, with over 345 locations worldwide.
Accenture – the consultancy firm.
Up 33% in the past 6 months.
Intuit – the software company.
Up 25% in the past 6 months.
Paychex – human resource, payroll, and benefits outsourcing services for small- to medium-sized businesses.
With headquarters in Rochester, New York, the company has more than 100 offices serving approximately 670,000 payroll clients in the U.S. and Europe. Up nearly 50% in the past 6 months.
It is an American chain of discount department stores headquartered in Dublin, California.
Up 30% in the past 6 months.
Colgate – Palmolive
Up 24% in the past 6 months.
It is an American global manufacturer of electronic instruments and electromechanical devices with a headquarters in the United States and over 220 manufacturing sites worldwide. The company was founded in 1930.
Deere & Co
It is an American corporation that manufactures agricultural, construction, and forestry machinery, diesel engines, drivetrains used in heavy equipment
Dover Corporation is an American conglomerate manufacturer of industrial products.
Investing should not be speculating in Government policies and media fads. If it is, you can go to Ladbrokes for better odds. Instead it should be using your expertise as a business person to find those which deliver consistent growing profits, revenues and cashflow at a sensible valuation and the share price delivers more return than volatility.
I hold for 12 months, review, and sell before then if the share price drops more than 25% from the highest its been since I bought it. This allows for sizeable gains, keeping profits if falls come and limiting losses too should they happen despite all my quality filters.
Who is Alpesh Patel OBE
Alpesh is the CEO of an asset management company. He is a former columnist for the Financial Times and hosted his investment show on Bloomberg TV. He is a former Visiting Fellow in Business, Corpus Christi College, Oxford University.
You can get a free download of his international bestselling book Investing Unplugged here: https://www.subscribepage.com/investingunplugged
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