September 5, 2018

If you’re frustrated with your country or planet, I just want you know there’s an option. There is a proposed new nation to reside on a space station. It’s called Asgardia and it’s currently taking applications for citizenship. It already has 263,000 “residents.” Don’t believe me? Their Website says:

“Asgardia will be a fully-fledged, independent nation inhabited on a low Earth orbit. It began with a satellite, Asgardia-1, that was launched in 2017, to be followed by an orbital satellite constellation launch in 2019-2020, and later by other satellite constellations and Space Arks, as well as by settlements on the Moon.”

Yes, I like weird and quirky facts. They appeal to me because outliers have relevance to our lives and the markets. When I came across this one, I knew I had to share it with you, but what relevance does it have to the markets? The first thing that came to mind is the concept of outliers. Probably 99.9% of earthlings accept the fact we are part of a governed country on earth and go about our business. Yet here’s Igor Ashurbeyli, a clear outlier. He has “out-there” lofty goals and radical ideas and he’s acting on them. His ideas are gaining a little traction, it appears. Igor is, in a peculiar sense, a clear outlier from planet earth.

Wolfram Mathworld defines an outlier as an observation that lies outside the overall pattern of a distribution, a clear deviation from the norm. There are negative outliers like Charles Manson and positive ones like Michael Jordan. Positive and negative outliers exist in the stock market, too.

I like to focus on the positive outliers in the stock market. I believe that leaders lead and losers lose, meaning that winners tend to keep on winning. I am not the type of investor who will go hunting in the discount bin for tomorrow’s stock treasures. I believe that we have a much better chance of finding winners near the top of the performance list, but that also means they tend to have higher prices.

There are plenty of free data sources to track positive outlier stocks. For instance, I just went to finviz.com and clicked 52-week new highs on the technical tab. The 7,455 stocks list was instantly whittled down to 261 stocks. That single filter omitted 96.5% of all stocks and left me with a handful.

One of my main screening factors is looking into sectors. Leading stocks will usually lead their respective industries and sectors higher. All we need to do is think of the FAANG stocks and their impact on the tech sector over the past few years. This is why I spend so much time each week analyzing which sectors are doing best. They have a big impact on determining the leading stocks of tomorrow.

Growth Sectors Closed August Strongly

The growth sectors had a strong week. Information Technology, Consumer Discretionary, and Health Care were our top three sectors last week. While nearly all sectors have been strong for the past three months, the big winners were Health Care and Consumer Discretionary stocks. Looking out over six months, we see Consumers, Infotech, Energy, and Health Care in the top four.

As these sectors rise, we can ask what factors are contributing to their rise. I have been harping on a positive economic backdrop for U.S. stocks. These sectors play into that scene perfectly. Record low taxes, international cash repatriation, record share buy-backs, record sales and earnings, record growth rates, and record highs in the market are the stuff bull markets are made of. These factors are especially benefitting Infotech, Health Care, and Consumer Discretionary stocks.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

It is no surprise then that on my lists recently I have seen a lot of tech, health, and consumer stocks rising to the top. The process of focusing on outlier stocks can help reveal winners of tomorrow. This should intuitively make sense. After all, isn’t this the process sports teams use to build their roster?  They don’t look for the worst player, thinking that they are cheap and will have a turnaround. They pursue the best good player they can afford and build a team of solid performers at what they are supposed to do. That’s the plan, anyway. Shouldn’t that be the same approach when building a portfolio of stocks?  Find the best ones you can afford with the highest likelihood of great performance going forward?

This was the premise behind “Moneyball,” the great story of the Oakland Athletics’ Manager Billy Beane as told by Michael Lewis. Peter Brand, Jonah Hill’s character in the movie version, explains this well:

“People are overlooked for a variety of biased reasons and perceived flaws: Age, appearance, personality. Bill James and mathematics cuts straight through that. Billy, of the 20,000 notable players for us to consider, I believe that there’s a championship team of 25 people that we can afford. Because everyone else in baseball undervalues them.”

Let me rephrase that quote with a few words substituted in bold for our investment purposes:

“Stocks are overlooked for a variety of biased reasons and perceived flaws. Statistics and mathematics cuts straight through that. Of the 20,000 notable stocks for us to consider, I believe that there’s a championship portfolio of 25 stocks that we can afford. Because everyone else in the market undervalues them.”

There’s a sea of stocks out there. I believe tomorrow’s winners live in the outliers, which can become tomorrow’s big winners.

About The Author

Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT

Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. *All content of “Sector Spotlight” represents the opinion of Jason Bodner*

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