Free Trend Following Trade Ideas For October 2019 (Part 3):
It’s like a coiling spring. As October slowly unfolds, bulls and bears just continue to grind it out. But with earnings season in full swing, we’re starting to get some interesting clues. And in today’s weekend update, I’ll be happy to show you what I’m seeing.
Now to get started, I like to look at the bigger picture by checking out index ETF weekly charts. This wide lens helps me see the major trends in the market, which can often determine the line of least resistance. This is important context for digging deeper into individual investment ideas.
October 2019 Asset Class Update:
First things first, let’s take a look at the S&P-500 index, via the actively-traded SPY ETF. As I mentioned at the outset, this chart has been in a tightening range the last few weeks, although prices did close off their highs…
For now, as long as we’re seeing higher lows on this chart, it’s hard for me to get too bearish. But I’m not complacent either…
Because while the US stock market has been chugging along, one area of potential concern is the tech sector. For example, after Netflix undercut subscriber-growth expectations this past week, the stock really started to fall (after initially surging higher). And more broadly, the Nasdaq 100 also faded off from its weekly highs.
Just take a look for yourself:
So with many tech earnings coming up in the next two weeks, it’ll be interesting to see how this resolves. Will bull or bears finally make a decisive victory? Or will we continue to muddle along sideways?
After all, on a global basis stocks are still at the top of their sideways channel. The All-Country World Index ETF (ACWI) shows this well. As there’s been almost no progress for 2 years:
So while US earnings might help the global index move higher, the other factor to keep an eye on is the potential momentum in European and emerging market stocks.
First, here’s a European index ETF (VGK), which has just recently made a higher high.
To be sure, this isn’t yet an uptrend. But it could be a start. Same thing goes for emerging markets, which despite fading a bit into the end of the week are still holding up pretty well and may have put in a higher low.
At the same time, perhaps due to a weak US Dollar, Treasuries and Gold continue to hold up, as shown by TLT and GLD below.
And so far at least, GLD has pulled back from recent highs but hasn’t broken down either…
All in all, from the big picture technical perspective, I think there are more reasons to lean bullish than bearish though, it’s not like we’re firing on all cylinders quite yet.
Now usually, at this point I like to show you a few of my favourite charts heading into Monday’s opening bell. but today, I want to do something a little bit different…
Stock Of The Week – Oct 2019 Part 3:
Instead of showing you a bunch of charts, I want to focus in on one particular stock and go a little bit deeper. I think this format will help you see the next level of my analysis, which you might find interesting.
To get started though, here’s the chart of Old Dominion Freight Lines (of which I picked up a handful of shares a few weeks ago). You can see it’s finished the week on a strong note:
Pretty good, right? I think the technical picture is hard to complain about. Shares of ODFL are hitting new highs after a long sideways consolidation. And the best part is, there appear to be strong fundamental trends underpinning this positive price momentum.
Let me show you why I always say traders can use fundamentals too!
The table above is provided by Morningstar and points to the fundamental performance of ODFL over the last 7 years. Overall it looks quite good; but, to summarize the sections I’ve highlighted in red:
- Revenue: Top-line (revenue) growth is strong. It has consistently chugged higher with strong gains in recent years. 2018 was the best year yet.
- Operating Margin %: Margins are also consistent, so this growth is dropping to the bottom-line (e.g. management is not buying unprofitable growth for the sake of growth). That’s something I always like to see.
- Diluted Earnings Per Share: Notably, consistent margins have also resulted in growing earnings per share (which have generally tracked the rising share price over the years). This is also reflected in the free cash flow.
- Average Shares Outstanding: This is all made better by the fact that management has not diluted shareholders by issuing more shares. The small float has been relatively consistent, actually falling about 5% over the past 5 years. This means as earnings grow each shareholder gets a bigger piece of the pie.
Now if that weren’t enough, the key ratios also look good here:
- Strong ROE/ROA – showing management is effectively deploying cash, even if top-line growth isn’t exploding at least the growth they are seeing is dropping to the bottom line.
- Low debt/equity – combined with the steady share count shown above, it’s nice to know owners are not being diluted and earnings should continue to accrue to existing shareholders. Plus, this helps reinforce management isn’t using leverage to juice the ROE.
These are two qualities I love to see in companies, especially when combined with the strong operating trends we just looked at. However, keep in mind…
Earnings are coming up October 24th so depending on your style, you may want to wait until after that timeframe to build a position. Alternatively you could wait for a pullback (… although the risk there is you won’t get it!) Here’s how I handle earnings season, in case you’re curious.
As for valuation, ODFL isn’t exactly cheap. It’s trading at 5 times book value, 22 times earnings and 3.5 times sales. But on the other hand, (and to paraphrase Warren Buffett), it can be worth a slight premium for a quality business. And I think that’s the case with ODFL.
Now, this is what I mean when I’m talking about combining fundamental and technical companies in terms of intelligent trend following! Of course, anything can happen, which is why I use a hard stop loss and always have a plan to sell. But over the years I’ve found it pays to try and put the odds in your favour with some quick fundamental checks too.
So what did you think of this format? Is it more helpful? Shoot me a note t let me know and I’ll adapt accordingly going forward. If you want to learn more about how you can do this kind of analysis yourself, just keep reading!
I also want to share my existing trend-following trading positions for US-listed stocks with you. So here they are in a FinViz watch list! Take a look if you’re still itching for more potential trade ideas.
They might be of interest because everything is laid out in charts so you can easily see what’s what.
Because actually, there have also been a lot of great trends this week so I’m quite bullish on many of my existing holdings.
I hope seeing my current stock portfolio helps give you more context on how I’m seeing the current market, AND, where I’m placing my bets.
While I’ve obviously shown you some of my favourite pick for the week ahead, I can also help teach you how to fish for your own trading and investment ideas!
Just keep reading.
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