Starting on Wall Street before the moon landing... I felt like a genius during my first bull market... When I realized that fundamental analysis isn't enough... Pulling back the curtain on the 'Power Gauge'... It's truly my life's work... The first 10 factors used in judging stocks... Your chance to 'test drive' the Power Gauge...
Editor's note: Last week, we introduced you to our newest corporate affiliate...
Chaikin Analytics was founded a decade ago by Wall Street legend Marc Chaikin. And these days, Marc is focused on leveling the playing field for individual investors like you...
He has designed the "Power Gauge" system as a way to help everyday folks find the best moneymaking opportunities in the markets. In last Thursday's Digest, he covered the "origin story" of the Power Gauge... and then on Friday, he shared some real-life examples.
Over the next two days, Marc will "pull back the curtain" on the Power Gauge...
In today's Digest, he will break down the first two groups of factors that the system tracks. And then tomorrow, he'll detail everything you need to know about the other two groups.
A reminder before we turn things over to Marc...
In roughly 26 hours, he will join us to make the biggest prediction of his 50-year career. He'll name a new type of company that he predicts will soon create a paradigm shift in U.S. business. And as that shift plays out, it could help you make five to 10 times your money.
Marc's event is absolutely free to attend. The action will begin promptly at 8 p.m. Eastern time tomorrow, May 25. He only asks that you reserve your spot in advance right here.
Now, let's turn our attention to Marc's latest message...
When I (Marc Chaikin) started on Wall Street, we hadn't yet landed on the moon...
That was a long time ago. And I've learned a lot along the way. But the most important lesson I ever learned happened early on in my decadeslong career...
You see, I joined Shearson, Hammill in 1966.
At the Wall Street firm, I was learning the ropes as a broker. I wasn't an analyst yet... But I spent as much time as I could with those folks.
And as an up-and-comer with a mind for finance, the stock market was the most interesting thing in the world to me... I wanted to understand everything about how it worked.
More importantly, I wanted to know how to use the stock market to make money. And frankly, I picked the right time to get into the business with that as my goal...
I earned my license on October 7, 1966 – the exact day the bear market ended...
For the first two and a half years of my career, it felt like every day was an "up day."
Life was good back then. I was 23 years old, bringing on new clients, and generating great returns for them as a broker. It felt like I had life – and the markets – all figured out.
Everything went great until early 1969...
That's when the first bear market of my career reared its ugly head. It lasted nearly two years... The benchmark S&P 500 Index plunged roughly 35% over that span.
It was brutal. Instead of every day being an "up day"... they were almost all "down days."
As tough as that time was, though, it quickly taught me the most pivotal lesson of my career... I wouldn't be able to survive in this business without "something else."
I just wasn't sure what "something else" was yet.
You see, until then, I had focused on 'fundamental analysis'...
It's what everyone used in those days...
Analysts and brokers spent their days diving into the ins and outs of companies. We came up with estimations of future business prospects and earnings... Then, we would decide if a company was cheap or expensive compared with those future prospects.
It all made sense to me at first. And as I said, it worked extremely well for the first couple of years... It was a bull market, after all.
But when that bear market hit, I realized I wouldn't be able to protect my clients, stay sane, or even go to sleep at night without that "something else." I needed to find something to supplement the fundamental research that my firm was doing.
That "something else" turned out to be technical analysis... It's incredible how much you can learn by taking a little time to study charts and track trends in the markets.
Even to this day, some people still think of technical analysis as some sort of "voodoo." But deep number analysis is what shaped my investment philosophy over the years...
It's also how I built the "Power Gauge" that I introduced you to last week. And starting today, I'd like to take some time to walk you through exactly how it all works...
You'll see that it's not voodoo at all. Instead, it's an objective way to look at any stock you would like. And most important, it's how you can quickly learn if it's time to invest or time to walk away...
The Power Gauge is a quantitative tool...
Overall, it looks at 20 different factors. By analyzing each of these factors in real time, it gives readings on thousands of individual stocks – from "very bullish" to "very bearish."
We break the 20 factors in the Power Gauge into four main groups...
- Financials
- Earnings
- Technicals
- Experts
Let's begin with Financials...
This group is made up of five factors that give us insights into both the financial health and current valuations of a company. You can see those five factors in the graphic below...
First up is the "long-term debt to equity ratio"... This factor is simply a comparison of a company's long-term debt to its shareholder equity.
Generally, you want to see a low ratio. That means a company doesn't have a lot of debt – and therefore, a big interest-expense burden – relative to the assets that it holds.
Next up is the "price-to-book ratio." This is a valuation tool that compares a company's book value (a rough estimate of its assets) with its share price. Like all valuation tools, a lower price-to-book ratio is better.
Our third factor in this category is "return on equity"... In short, it gives us a glimpse into a company's operating effectiveness.
Specifically, it's a ratio of a company's net income and shareholder equity. In other words, it's how much money a company makes compared with its net asset base (total assets minus debt).
We want to see a higher ratio... That tells us the company is effective at making money.
The fourth factor is another valuation tool... It's the "price-to-sales (P/S) ratio." This ratio compares a company's share price with its total revenue.
We always want to pay a low price when investing. And looking at the current P/S ratio lets us know if we're paying too much for $1 of revenue with a particular company.
Our last factor in the Financials category is "free cash flow." This is the cash earnings left over after a company pays for any real cash expenses – like operations and maintaining assets.
This is one of the few items on the income statement that accountants can't mess with... So you can't fake it. It only looks at cash that comes in versus cash that goes out. We ignore any noncash expenses.
Simply put, if a company has a lot of free cash flow, it's likely in a strong financial position.
By combining these five factors, we're able to come up with an overall reading for the financial strength of a company. And of course, we want to find companies in the best financial shape possible.
Our next major group of factors in the Power Gauge is Earnings...
Once again, this portion of the Power Gauge looks at five factors.
These factors give us powerful insights into the current earnings of a company. But it's not just that... They also help us see the trends in those earnings and where they're headed.
You can see all five Earnings factors in the following graphic...
In the Earnings category, the first factor is "earnings growth." This factor is pretty straightforward... We want to see a company's earnings moving higher. It shows us that a company is not only in a strong position, but it's getting stronger.
Next, we look at "earnings surprises." That's simple to understand, too... When a company outperforms what analysts expected, it's a good thing – an earnings surprise.
Seeing a company beat earnings tells us that the underlying business is in better shape than the experts believed. And beyond that... a string of positive earnings surprises also indicates that the business trends are in our favor.
Our next factor is the "earnings trend." This supplements the longer-term growth factor by honing in on the recent past.
Specifically, we want to see earnings in a strong upward trend. That means this company is performing better than last year... and that the three-to-five-year trend is likely still in place.
The fourth factor in this category is the "projected price-to-earnings (P/E) ratio." This is a valuation tool that compares the current price of a company with its earnings.
The ratio takes into account a company's future earnings. So this tool not only shows valuation... it also looks at a company's future prospects to determine that value. Like our other valuation tools above, we like to see a smaller projected P/E ratio.
Our last Earnings factor is "earnings consistency." This factor tells us how much variability exists in a company's earnings...
You see, some businesses can experience wild swings with their earnings from one quarter to the next. That's often dangerous for investors. Instead, we prefer to see consistent (and growing) earnings before we invest.
Between the Financials and Earnings groups, we can gather a good overview of a company's health...
But the work isn't finished... There's still a lot to look at through our Power Gauge.
In tomorrow's Digest, I'll walk you through the rest of our factors... We have 10 factors remaining in two major categories. You'll see that taking a technical and quantitative approach to investing doesn't have to be difficult.
But before we close today, I've got a feeling you might have a nagging question...
'Marc, how can you so confidently give away all the details of your model?'...
I understand if you're asking that question in your head right now. Most folks who come out of retirement to build a proprietary model like I did don't then tell you exactly how it works.
That logic misses the point, though...
You see, while building the Power Gauge, I've learned that the 20 different factors matter... But something else is more important.
Let me give you an example so you can see what I mean...
Say I make you dinner and give you a list of all the ingredients I used. The scratch-made pasta had flour, eggs, and salt. The sauce included tomatoes, garlic, onions, and oregano.
That's all I tell you, though... I don't give any further instructions on how to make it.
Do you think you could recreate the meal exactly as I did? I'm not talking about making something close to what I made... I'm talking about really nailing it – an exact replica.
If you're a trained chef, maybe you could do that. But we all know there's a lot more to recreating a final product than simply knowing the list of ingredients that go into it.
The Power Gauge is the same way...
The 20 quantitative factors are important. Without them, the Power Gauge doesn't exist. But the key to pulling the whole "meal" together is their specific weighting in the process.
I keep that part of the process under wraps... It's proprietary information that allows me to safely share the list of Power Gauge ingredients with anyone who asks.
The great news is that with the Power Gauge, you don't need to worry about the recipe. You can use the model very simply... Just plug in the stock you're interested in and off you go.
That exciting reality is part of the reason why I'm hosting a special event tomorrow night, May 25, at 8 p.m. Eastern time. It's the first time I've ever done something like this...
I'm planning to shed more light on the Power Gauge and explain how you can use it to potentially earn triple-digit profits. And I'll detail a once-in-a-generation opportunity to possibly make substantial gains on a major change sweeping across America right now.
Plus, as I've explained in recent days, I want you to "test drive" the Power Gauge system at no charge until the event begins. You're running out of time to see how simple it is to use...
Get started by saving your spot for tomorrow night's event right here.
New 52-week highs (as of 5/21/21): Bristol-Myers Squibb (BMY), Richemont (CFRUY), Centene (CNC), CTS (CTS), CVS Health (CVS), Expeditors International of Washington (EXPD), SPDR EURO STOXX 50 Fund (FEZ), Hershey (HSY), IQVIA (IQV), Nestle (NSRGY), Novo Nordisk (NVO), Invesco S&P 500 BuyWrite Fund (PBP), and Health Care Select Sector SPDR Fund (XLV).
Not much is happening in the mailbag today. Have you already signed up for tomorrow night's event? If so, tell us what you're looking forward to by sending us an e-mail at feedback@stansberryresearch.com.
Good investing,
Marc Chaikin
Roxbury, Connecticut
May 24, 2021