It's Simple to Beat the Market
Editor's note: To succeed in this market, you must prepare for the right opportunity...
With out-of-control inflation, geopolitical conflict, and the banking crisis throwing stocks into disarray, many investors have been hiding their money on the sidelines to avoid this heightened volatility. But according to Income Intelligence editor Dr. David "Doc" Eifrig, you can still uncover profitable stocks in these difficult times – if you know what you're looking for...
That's why Doc created a formula for identifying winning stocks. And he believes it's critical for investors to understand this strategy in order to navigate this uncertain market.
In today's Masters Series, originally from the April 5 issue of Doc's free Health & Wealth Bulletin e-letter, he talks about the details he looks for when trading stocks... details how his investing formula has outperformed the broad market... and explains how folks can apply this strategy to their investment decisions...
It's Simple to Beat the Market
If you want to beat the market, it's simple...
Back in November 2019, I gave readers the key to making good investments... I wrote an essay called "Doc's Formula for Buying Winning Stocks." Basically, I gave away the secret sauce that my team and I use to look for investment ideas.
Over my decadeslong investing career, I've learned that if you buy and hold businesses that meet five specific requirements, you'll make a lot of money over time. And you'll experience less volatility along the way.
As a reminder, here are the five things you want to see in an investment...
- Consistent top-line growth – A company that has multiple years of consecutive revenue growth.
- Does more with less – A company that has a return on assets ("ROA") of at least 10%. (The formula for ROA is net income divided by total assets. The higher that number is, the better a company's management team is at using its assets to generate income.)
- Increases dividends every year – A company with at least 10 or more consecutive years of dividend growth. (This would make a company a "Dividend Achiever.")
- Avoids too much debt – A company that has a net debt-to-earnings before interest, taxes, depreciation, and amortization ("EBITDA") of less than 4.
- Trades for a reasonable price – A company that has a price-to-earnings multiple of less than 25.
In August 2021, I ran this magic formula again and showed readers 12 stocks that fit my requirements. Specifically, I said, "If you have some free cash lying around, this list is a good place to start."
Of course, the key to any investing formula is time. So today, let's check in on that list of stocks and see if the formula is holding up...
In short, we're doing much better than the market...
While the market has fallen 6.3% since August 2021, the average stock from my list is only down 1.8%. That's a pretty significant difference in the investment world. And we're absolutely crushing the tech-heavy Nasdaq Composite Index, which is down nearly 19%.
We also promised less volatility... The average "beta" of these stocks is just 0.8.
In stock market parlance, beta measures the correlation of an individual stock to the market as a whole. A beta of 1.0 means the stock's price moves directly one-for-one with the market: If the market is up 5%, the stock is up 5%.
A beta of more than 1.0 means the stock's price is more volatile than the market (magnifying its rises and falls). And a beta of less than 1.0 means the stock's price is less volatile than the market.
Of course, losing 1.8% of your cash isn't anything to brag to your buddies about – even if it is much better than the market.
The key with this magic formula is time. These stocks are capital compounders... This means that every year, your dividend payment will get a little bigger, and the business will continue to improve.
As a result, we expect this type of outperformance to only grow over time...
Good investing,
Dr. David Eifrig
Editor's note: Right now, investors have the opportunity to profit from this turbulent market. And Doc has been waiting for this moment for more than a decade...
That's why he recently went on camera to talk about how folks can use a simple strategy to take advantage of today's rampant inflation. Click here to watch the full replay...