I want to share some insight into the value of using the Discount % as part of the Stock Investor’s Blueprint and Millionaire 50 portfolios. Each month, we run our core algorithm and then rank our stocks based on the Discount %.
The stocks we want to own will have a negative discount percentage, i.e., they are trading below the value of their one-year earnings growth rates. You’ve seen the power of the Discount % first hand. A great example is our recent closeout of William Lyon Homes ( ) which landed us a 26.7% gain in one month.
But before I get any further into how the Discount % makes us money, I want to talk about the other side of the coin. And that is how it helps us avoid overvalued stocks that can come crashing down at the first sign of weakness. If the stocks we want to own have a negative discount percentage, then the stocks we want to avoid would obviously have a positive discount percentage , i.e., they are trading above the value of their one-year earnings growth rates.
The action in Kemet Corp. ( ) on Thursday is a perfect example. The electronic components supplier released preliminary fiscal second-quarter results that were in line with analysts’ expectations. Yet, the stock cratered on the news, losing more than 35% of its value in one day.
This likely came as quite a shock to KEM shareholders, who had enjoyed a monster run-up since the beginning of the year. Kemet had recently been touted as a “hot stock” by The Motley Fool and Zacks Investment Research.
While no one can get every trade idea correct, it pays (literally) to use the Discount % approach to avoid stocks that can lose you money… like 35% in one day. When we ran our algorithm at the beginning of November, this is what we saw:
[ultimatetables 1 /]
With a Discount % of 173%, our algorithm was signaling KEM was an extremely overvalued stock.
Of course, Kemet’s profile could change in the weeks or months ahead. In fact, if it keeps selling off, it could turn out to be a negative Discount % stock very soon, and we could buy the stock at a significant discount to the company’s future growth.
Speaking of buying stocks at a significant discount to the company’s future growth, we have Lantheus Holdings ( ), a recent addition to our Stock Investor’s Blueprint XX Portfolio.
On Thursday, shares of the medical supply company soared more than 20% ahead of the company’s earnings report. When the company announced after the close, quarterly results beat expectations and management raised its full-year guidance.
How did we uncover this gem? You guessed it — the Discount %, which has remained nearly constant around -38% for more than two months.
[ultimatetables 2 /]
This told us the stock was undervalued against one-year earnings growth. Additionally, the chart showed LNTH breaking out of a base in the $18-$18.50 range and challenging the recent high at $20.
A sustained move above $20 would constitute a real breakout, and that combined with the Discount % being negative is why we added it to our portfolio this month.
We executed the trade on Nov. 1 at the open and, admittedly, did not get a favorable price, as the stock fell nearly 7% that day. However, on Nov. 2, the stock shot higher, putting our position up almost 13% in just two days. Should the stock’s momentum carry it above a 20% net gain, we’ll take a profit on this stock in the XX portfolio.
The bottom line: Remember to use more than just a media recommendation on a stock you may want to invest in. In our case, we use deeper fundamental analysis with the Discount % to help us find growth stocks at a reasonable price. LNTH and WLH are just two recent examples where we’ve succeeded.
About The Author
Traders Reserve cofounder, John Hutchinson, is the product mastermind behind The Stock Investors Blueprint, Millionaire 50, Options Income Blueprint and Six-Figure Portfolio Coaching.
The entrepreneurial bug bit John at an early age. His first endeavor was his paper route, which he grew from 60 to over 120 daily deliveries.
His latest venture: Entreprenation – an online training, coaching and development program to ignite entrepreneurial success with proven strategies to increase sales, accelerate revenue and build dominant, sustainable businesses. John’s book, The Wealth Shield, is available on Amazon.com.