The Power of Superstar Stocks and How to Find Them
The list is elite, and shrinking…
Note from Michael Salvatore, Editor, TradeSmith Daily: Back in June 2023, we introduced you to Lucas Downey, co-founder of MapSignals.com alongside Quantum Edge Pro editor Jason Bodner.
One of Lucas' most important essays from his debut was his piece on what he calls "superstar stocks." These rare, few stocks make up the majority of the stock market's gains over the long haul, and often number just in the dozens.
Today, we've updated Lucas' original piece on these special stocks, which rings just as true today as when we first shared it with you. Read on to learn what makes a superstar stock, and how to find them…
The Power of Superstar Stocks and How to Find Them
By Lucas Downey, Contributing Editor, TradeSmith Daily
Superstar stocks are the holy grail of investing.
You know the ones I'm talking about — the stocks that tower over all others year after year.
You see it in the marketing that entices you with finding the "next Nvidia" or the "next Microsoft."
The great news is if you find them, they can transform your portfolio in a huge way. The bad news is they are getting more difficult to find.
Yes… the list of all-star stocks is shrinking.
To prove this phenomenon, consider the following study from Professor Hendrik Bessembinder.
He found that in nearly 100 years of data, the number of big, winning stocks is falling.
From 1926 to 2016, just 90 stocks accounted for half of the market's wealth creation. That's an incredible stat considering the thousands of stocks traded in those 90 years!
When you expand the results out just six more years through 2022, the outlier count drops to 72:
Source: Bloomberg
This reveals a shocking truth — just a handful of stocks are responsible for most of the market's gains.
This realization may have you thinking it's best to just park your money in a passive ETF tracking the market and call it a day.
After all, the S&P 500 averages a 10% annual gain going back decades. Pretty good, right?
Well, you can't count on every year.
As I write, the S&P 500 ETF (SPY) has been flat from November 2021 to December 2023 … basically flatlining for over two years:
Owning an indexed basket of stocks and hoping for the best is never a good strategy… at least not for me.
That's because, inside those major indexes live individual stocks that represent actual businesses.
Some are winners. Some are losers. A few are all-stars.
Here's the million-dollar question: Is there a process to uncover superstar stocks?
The answer is YES!
This is where a quantitative approach can help you sift through a noisy market and uncover the shortlist of companies exuding superstar qualities.
Finding Your Next Superstar
Given my years on Wall Street, I learned to keep things simple.
All you need to do is focus on two basic traits: healthy fundamentals and support from Big Money.
First, let's cover healthy fundamentals. When it comes to businesses, growth is what matters.
Let's use Microsoft Corp. (MSFT) as an example. This is a name I've personally owned for years. The software giant is a well-known entity because of its office products, cloud business, gaming, and more.
The company has a long history of attractive fundamentals that include growing sales and earnings. In 2017, the company saw sales climb to $89.9 billion with net income of $21.2 billion. Fast forward to 2022, and sales ballooned to $198.2 billion with net income of $72.7 billion.
Those are mind-numbing growth rates. It's not surprising that the stock price has exploded over the last 15 years:
Source: YahooFinance
Any company with a five-year sales compound annual growth rate (CAGR) of 14% and a five-year net income CAGR of 34.3% is going to attract some of the brightest minds on Wall Street.
Here's where institutional support comes into play, which is the second trait of superstar stocks.
Write down the following six words: Big Money chases the best stocks.
I've seen it with my own eyes. Large institutional traders spend countless dollars researching the fastest-growing companies.
As long as the business keeps firing on all cylinders, institutional appetite stays strong. That's been the case with MSFT shares.
Below plots the same 15-year time frame, but you'll notice blue bars accompanying the stock higher. Those signals encompass the two traits of great stocks: Strong fundamentals and Big Money buying:
The strongest force in the market is supply and demand. When demand is high, like in Microsoft's case, shares have nowhere to go but up.
That's the stairway to heaven! Few stocks have this repeatable pattern.
Since 2008, MSFT shares have gained 1,180% with institutional footprints guiding the way. Compare that to the S&P 500's (SPY ETF) gain of 319%.
Certainly, 319% isn't bad, but hunting for superstar stocks is totally worth it. This brings me back to Bessembinder's study.
Of those handful of market-beating names, Microsoft was No. 2 on the all-time list of shareholder wealth creation. Other household names made the list too.
Nvidia Corp. (NVDA) was No. 26. Want to guess who's been along for the ride?
The Big Money!
Check it out:
Since 2015, NVDA shares have surged. It's been one of the most-bought stocks in that short time frame.
So if you want to find the best stocks, keep it simple and follow the Big Money.
Final Thoughts
Look, there's no guaranteed way of uncovering the ever-shrinking list of superstar stocks.
But institutional buyers have spotted them in the past.
Chances are the next leadership names will be uncovered early just the same way.
This is what makes investing a worthwhile endeavor. Just a couple of these outliers can transform a portfolio — and help you achieve your wealth-building goals.
Regards,
Lucas Downey, Contributing Editor, TradeSmith Daily
P.S. Remember when I said growth was a hugely important quality of superstar stocks?
Andy and Landon Swan, founders of LikeFolio, are experts in this field. They use a proprietary, A.I.-powered social-media-crawling algorithm to get unique insights on publicly traded companies by listening to the sentiments of their customers.
In just a few short days, they'll be joined by our good friend Louis Navellier from InvestorPlace to discuss this earnings strategy in the A.I. Earnings Predictor Summit.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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