How My Stock Picks Easily Beat Even the Red-Hot Nasdaq in the First Half of 2018

 | Jul 03, 2018 | 10:30 AM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

aapl

,

nvda

The first half of this year was a true hodgepodge of conflicting news. Stocks roared out of the gate in January only to collapse near the end of that month. Weakness persisted right through the beginning of April.

Since then the Nasdaq performed well, the S&P 500 clawed back to a small year-to-date gain and the Dow Jones Industrial Average (DJIA) remained depressed. The Dow Industrials closed out the first half with a 1.81% loss excluding dividends.

Looking at the past 12 months paints a much better story for those who long equities. All three indices posted double-digit gains. Once again, tech stocks were the stars. The Nasdaq Composite posted a 22.23% increase over the previous year, well above both DJIA and S&P 500's returns.

Regular readers of my Real Money Pro columns know that I don't play with many tech stocks. Despite the market's recent preference for technology, you didn't need to own FANG, Apple (AAPL) or Nvidia  (NVDA) to make good profits.

My value-oriented portfolios did just fine. My stocks exhibited much higher than normal volatility thus far in 2018 but showed excellent first-half results. June, with better than a 12% gain, was by far my best month of the year.

The margin account where I buy stocks and sell options posted a 10.54% total return in the first half. That was far superior to the DJIA and SPY. I even managed to best the red-hot Nasdaq by almost 20% (10.54% versus 8.73%).

My trailing 12-month return, at 48.39%, looked even better. That more than doubled the Nasdaq Composite and was over triple what the DJIA and S&P 500 produced.

How did I manage to do so well?

First off, I was able to select a high percentage of winning stocks. I'm an investor, not a trader, so my time frame typically stretches out to at least 12 to 24 months. That allows me to buy beaten up shares at bargin prices without worry about near-term price action.

If stocks I like go lower after taking an initial position I tend to buy more, averaging down. Experience has taught me that even the most-hated stocks see a change in mood faster than you'd expect.

A side benefit of having shares which took a while to rebound?

By the time they approach their target prices my holding period may already be at, or past, the 366-day minimum holding period needed to qualify for long-term capital gains tax rates.

Option sales provide leverage which can translate modest gains into good ones while turning big upturns into tremendous profits. Options sales incur no interest expenses as they bring money into the account. That is much more cost effective than incurring margin debt by borrowing from my brokerage firm to own stocks with borrowed money.

Today's world is a short attention span theater for most traders. Few people or institutions seem willing to commit to holding for more than a year or to selling options extending out more than a few weeks or months.

When I sell puts out to January of 2019 or 2020 I'm often the only person in America trading those options. Less competition makes for inefficient pricing, providing better chances for making money. The other key difference in my option trading is my focus on "directional" trades rather than "mispriced volatility."

My option sales act as proxies for owning stocks that I feel bullish about. They are never done simply because the options are cheaper than implied volatility suggests they should sell for.

What will the market do in this year's final six months? I have no idea. Rather than futilely trying to predict the action I suggest concentrating on holding shares which appear too cheap to remain low.

Past performance is not necessarily indicative of future performance. Always do your own due diligence before investing.

I'll be quite satisfied if the next six months simply match the just-completed first half.

(This commentary originally appeared on Real Money Pro at 7:00 a.m. ET on July 3. Click here to learn about this dynamic market information service for active traders.)

BEST IDEAS

REAL MONEY'S BEST IDEAS

News Breaks

Powered by

COLUMNIST TWEETS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.