Winner and loser stocks March 2019

Remember December?

You still remember December last year when the stock market was anticipating the coming recession and the bear market was taken for granted? I know that’ s a damn long time ago. Fast forward three months.

Hail to the one who kept his nerves including his stocks. Since then, the stock market has only known one direction: upwards. Since the beginning of the year, the S&P 500 has risen by 13% and the Nasdaq 100 by a proud 16%. Even the German Dax, notorious for its inertia, has moved by 9%. At the same time, the Euro has been steadily losing ground against the USD since its interim high at the beginning of 2018, which has acted as an additional price turbo for many investors outside the US investing in US equities.

Does that put an end to the danger of recession? No – it just shows that the stock market is not a reliable indicator. Hardly surprising, because the future is and remains unknown. What to do? So sell all stocks after all? I would not advise that. Instead, it would be a good idea to bet on stocks of companies that increase their profits in the long term. Because:

Growing profits always lead to capital gains and dividends in the long run

Consider the list of monthly winners and losers from the point of view of long-term profit growth. Just because a stock has gained double digits in a month does not mean that it is a good overall investment. This also applies if the stock shines with a dividend yield of almost 14%. We are talking about the Belgian postal service (Bpost), which gained almost 18% in March. However, there is no sign of a long-term increase in profits on DividendStocks.Cash:

Bpost – lacking long-term profit growth

Tobacco stocks – a return to normality?

The recovery is different for tobacco stocks. There is reason to hope that the months of sell-off will be over. For example, British American Tobacco gained 11.5% in March. Altria also gained just under 11%. After all, Philip Morris achieved a plus of a good 3%.

If one compares the profit increase of British American Tobacco with that of bpost, it becomes clear that we are dealing with two qualitatively completely different companies:

British American Tobacco – Long-term profit growth looks promising

For those interested in the high dividends in the tobacco industry, I propose this video, in which I analyse tobacco stocks based on the most important dividend and earnings metrics:

Video: Dividend stocks in the tobacco industry – a roundup

Nvidia – Profit growth vs. valuation

Long-term profit growth alone does not make you happy. It also takes an attractive valuation of the stock. Nvidia shows that extremely high valuations are associated with an increased risk of a price drop. This occurs as soon as high expectations are disappointed or the stock market as a whole is in decline. Nvidia shareholders had to cope with price losses of 55%. Since the beginning of the year, however, the stock price has risen again and – by historical standards – entered overvalued territory again:

Nvidia stock – Peaked at 290 USD before dropping more than 50%

As a tech company, however, Nvidia is an extreme example. If you are conservative and invest in less volatile stocks, you can also buy some overvalued stocks. In this case, however, you should give the stock time to grow into the current overvaluation and should not be disappointed if rapid price gains fail to materialize.

The image below shows how growing earnings and cash-flows lead to higher fair values finally leading to higher stock price in turn leading to capital gains:

Capital gains thanks to long-term profit growth

Of course, a stock can also be undervalued. In March, Bayer again fell sharply by 20%. Fair value calculations and, in the case of dividend stocks, orientation on the current dividend yield provide valuable guidance on whether a purchase might be worthwhile.

Bayer stock – Only in 2003 the dividend yield was higher than today

Conclusion: Profit from stocks with a calm hand

Blessed is the one who will not be shaken by volatility. This applies both to horror reports of mass media concerning the entire stock market as well as to individual stocks such as Bayer or Wirecard. Fundamental analysis is an effective calming pill in this context. In particular, the sight of a chart with profits increasing in the long term is extremely reassuring.