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Stock Portfolio ’Window-Dressing’ At Work As Investment Managers Sell Unattractive Losers And Buy Trendy Winners

MtR by MtR
June 27, 2021
in Stocks
0


An investment manager-adviser selecting stocks to buy and sell


getty

When the quarterly reports go out, stock managers and advisers want their investors to get positive vibes when examining their portfolio holdings. Thus, toward each quarter’s end, there can be some “window-dressing” selling and buying designed to spruce up the holdings list.

Obviously, selling to weed out any big disappointments is important – particularly if there was negative news tied to the poor performance.

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So, how about on the positive side? Investors like seeing the leaders. This quarter there are many good-looking choices. They can be found by screening the databases.

Identifying desirable stocks

For example, here is an S&P 500 search for stocks that meet the following criteria (Data source: Financial Visualizations – FinViz.com).

  1. An index-beating 3-month return of 10% or more (This period covers most of the current quarter)
  2. An index-beating year-to-date return of 15% or more (To ensure the 3-month return wasn’t simply a fluke or rebound)
  3. A current price level of only 0% to 10% below the stock’s 52-week high (A measure of current price position and trend desirability)
  4. An average analyst recommendation of “Buy” or better (A measure of fundamental valuation soundness at stock’s current price) [The FinViz.com data refer to this rating scheme: 1=strong buy, 2=buy, 3=hold, 4=sell and 5=strong sell — “Buy or better” range is 1 to 2.5]

One thing to note: There are many well-known companies that do not meet those criteria. That doesn’t mean necessarily that they are sell candidates. Instead, they simply didn’t classify as “trendy winners” using this particular screening.

To illustrate the selection sensitivity, only 3 (10%) of the 30 DJIA stocks met all four criteria: American Express, Goldman Sachs and Microsoft. Among the five FAANG stocks, only Alphabet/Google and Facebook made it, leaving behind Apple, Amazon and Netflix. Even popular Tesla failed to make the cut, and doing so overwhelmingly by meeting none of the criteria.

Before examining the stocks that met all the criteria, let’s see where Apple, Amazon, Netflix and Tesla failed to make the cut (the circled data):

Where Apple, Amazon, Netflix and Tesla failed to pass criteria


John Tobey

Now let’s turn to the S&P 500 stocks that met all four criteria

The 94 S&P 500 companies that met all four criteria are listed below. They are grouped by sector and then sorted by industry. Besides the criteria above, the data include the two popular valuation measures of forward price/earnings ratio (based on the next fiscal year’s earnings estimate) and dividend yield.

Table #1 – Basic Materials and Communication Services


John Tobey

Table #2 – Consumer Cyclical


John Tobey

Table #3 – Consumer Defensive and Energy


John Tobey

Table #4 – Financial


John Tobey

Table #4 – Healthcare


John Tobey

Table #6 – Industrials


John Tobey

Table #7 – Real Estate


John Tobey

Table #8 – Technology and Utilities


John Tobey

The bottom line: Stock selection investing is in full swing

It’s important to watch individual stocks in this market. Covid hit many businesses simultaneously, causing correlated moves within the stock market. Now, however, the return to mostly normal business operations means companies are back to pursuing individual and competitive strategies. That means stock selection offers the potential for soundly beating the market.

Therefore, now is a good time to invest in individual company stocks and/or select an adviser or fund to do the work. The payoff could be significant.



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