Sometimes, investment ideas can come from monitoring trends. This week, we noticed a new trend appears to be at work. Combining this with some other long term trends in the market results in a short list of stocks that could be among the market’s biggest winners in the short run, and the best option of investing in stocks. »
One of the long term trends in the stock market is the increasing importance of global economic diversification. This can be applied to stock selection by analyzing a company’s sales. Companies with a significant amount of foreign sales will be the global companies poised to benefit from this trend.
Testing the Value of Foreign Sales for Large Companies
According to FactSet, a research firm, “coming into the Q3 earnings season, companies in the S&P 500 with higher global exposure are expected to benefit from the tailwinds of a weaker U.S. dollar and higher global GDP growth.”The research firm maintains a database showing Geographic Revenue Exposure based on the most recently reported fiscal year data for each company. In a recent research report, stocks were divided into two groups: companies that generate more than 50% of sales inside the U.S. (less global exposure) and companies that generate less than 50% of sales inside the U.S. (more global exposure).
Further analysis was then done to find that companies in the S&P 500 with higher global revenue exposure are expected to deliver stronger growth in sales and earnings than S&P 500 companies with lower global revenue exposure.
The results are actually rather dramatic. Companies with a majority of sales in the US are expected to report a contraction in earnings and sluggish growth in revenue. Companies with a majority of sales outside the US account for all of the expected growth in earnings in the index for this quarter.
Generating Trading Ideas From That Research
While this is useful information, it is possible the information could be even more powerful when applied to stocks trading at lower prices than those in the S&P 500. This can be done by limiting our search to low priced stocks. These stocks are likely to deliver the largest short term percentage gains.To find potential buy candidates, we can screen companies using the free screening tool at FinViz.com. This tool allows us to find companies meeting a variety of criteria. For this screen, we will look for low priced stocks with substantial global exposure.
FactSet is a more sophisticated data analysis tool and has significantly more capabilities than free tools. To find companies with foreign exposure, we will need to use a different approach than the one applied in the study summarized above.
We will limit our search to companies traded on US exchanges that are headquartered outside the US. This will allow us to find companies which are likely to experience most of their growth outside the US.
The fact that they are headquartered in other countries indicates they have significant business operations there. The fact that they are listed and available for trading in the US shows that they also have substantial operations in this country.
We will also search for stocks trading below $5 because stocks at this price are more likely to deliver large gains, in percentage terms, than stocks trading at higher prices. We will also limit our search to stocks with a significant amount of institutional and insider ownership, at least 20% on each measure.
High institutional ownership shows that large investors have done research on the company and determined that it is a buy. Large insider ownership shows us that that the managers of the company have faith in its operations.
Without access to more sophisticated research tools, these two factors can tell us what the research reports likely say. Institutions tend to sell when research reports are neutral to negative. Insiders tend to sell when long term prospects dim.
Finally, we limited our search to stocks with low volatility. We used beta to measure volatility and required the stock to have a beta of less than 1. This avoids the most volatile stocks which carry higher than average risk of loss.
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