Finding Opportunities in the Clutter of 4,500 Companies
Where do you start if you want to buy an investment is a specific sector, or industry and you have over 4,500 possible choices? A possible sector is Health Care. An industry within Health Care is Biotechnology. There are at least 1,000 health care companies, and an equally daunting number of biotechnology companies – over 500. In this post I will discuss what I look for using the Seeking Alpha website. Then you will better understand why I added another 100 shares of ABBV on Thursday.
Why is Seeking Alpha “Alpha”?
Alpha and beta are two different parts of an equation to explain or understand the performance of stocks and investment funds. Beta is a measure of volatility relative to a benchmark, such as the S&P 500. Alpha is the excess return on an investment after adjusting for market-related volatility and random fluctuations. Alpha and beta are both measures used to compare and predict returns. – SOURCE: Investopedia
The QUANT Rating
“Seeking Alpha’s Quant Ratings are an objective, unemotional evaluation of each stock based on data, such as the company’s financial statements, the stock’s price performance, and analysts’ estimates of the company’s future revenue and earnings. Over 100 metrics for each stock are compared to the same metrics for the other stocks in its sector. The stock is then assigned a rating (Strong Sell, Sell, Hold, Buy or Strong Buy), and a score (from 1.0 to 5.0, where 1.0 is Strong Sell and 5.0 is Strong Buy).” – Seeking Alpha
I am most interested in growth and profitability. That is why the QUANT rating is most helpful. When I was in school, I did not want D’s or F’s. The same is true with investing. “Seeking Alpha grades each stock by five “factors” — Value, Growth, Profitability, Momentum and EPS Revisions. To do this, we compare the relevant metrics for the factor in question for the stock to the same metrics for the other stocks in its sector. The factor is then assigned a grade, from A+ to F.” – Seeking Alpha
Dividends: If there are no dividends, then there should be a reasonable expectation that the share price of the investment will grow and that I can sell the shares at a profit. I also like “synthetic dividends” that I can get by selling covered call options. ABBV has both quarterly dividends and options trading possibilities.
Market Capitalization: While it is no guarantee of success, large-cap stocks are generally less likely to become losers. That isn’t always the case, but large-cap stocks are less likely to fail than small-cap stocks. Therefore, most of the time I don’t want to buy any stock with a market capitalization less than $1B. That isn’t necessarily true of BDCs and other specialized investments, but it is true of technology and health care stocks.
Growth: A business that is growing is usually going to have growing profits and perhaps even growing dividends. I certainly don’t want to buy a business that is in decline. Many people watched their investments in Enron, Kodak, and Blackberry evaporate. I don’t want an evaporating investment.
Profitability: Just because a business is worth one trillion dollars doesn’t mean it is profitable. Profits are always important. If a business is operating at a loss, at the very least the losses should be decreasing and there should be hope that profits are coming a couple of years down the road.
ABBV and Seeking Alpha
Thursday, I purchased another 100 shares of ABBV. This holding was added to my traditional IRA. I then sold a covered call option on those shares that expires Friday, April 26 for a profit of $104.32. I call this a synthetic dividend as I receive it immediately. If the shares are called away on that date the short-term profit will be $750 plus the covered call profit.
If the shares are not called, I can enter another covered call trade or I can just treat this as a long-term holding for dividend growth. Either way, this is easy income.
Full Disclosure
ABBV is one of my top ten investments.
Know Your Flocks & Herds 