Do you buy stock in the companies with the best near-term earnings, the ones that just blew out the quarters and reported fantastic numbers?
Or do you buy the companies with currently depressed earnings that can make huge comebacks if the Trump rally is forecasting a much better economy?
It's a valid question. Almost every tech company that had superior earnings is being chipper-shredded the way a branch too close to a power line gets pruned and hacked in savage fashion.
Meanwhile, you have companies like Caterpillar (CAT) that literally throw cold water on the rally. Its shares have seen saying you shouldn't get too excited about what Trump wants to do because federal money may not be seen for ages, and in the meantime the rest of the world is soft.
Total buzz kill.
My suggestion? I say you bust the whole dichotomy. I say you want to make a bet on the mechanics of the market as much as the fundamentals. You also want to seize on the fact that a pruned tree is one that can often grow back faster than you realize, while at the same time trees that aren't flowering now will eventually, and you can't wait for it to happen to buy.
So let me give you two concrete examples of what I mean. If you look at the companies that had the single biggest earnings beats, that bowled over the estimates, you come back with Nvidia (NVDA) , the chip company for the Internet of Things age, the automobile, artificial intelligence, machine learning and all those fantastic secular trends that are here to stay.
This stock soared 30% when it reported its quarter. It is up more than 160% for the year. It has been pruned from $94 to $87, but it is still up 20 points from when it reported its breakout quarter.
We know why it is weak. It's run too much. It is a source of funds, so money managers who don't have new money coming in can go buy the industrials that benefit from Trumponomics of the banks that win under a loosened regulatory regime.
It also has a bad chart now, a rollover that momentum investors do not want to get in front of.
But here's my take. Do you really think everything is going to go smoothly in the transition from President Obama to soon-to-be-President Trump? You think the industrials can go higher every day over the same thing that keeps sending them up, the era of good feeling that Trump has toward business?
I say no way.
In fact, I say there will be speed bumps, and when they happen, managers will switch back to the companies that have the best numbers. They will come back to NVDA. And it will be helped because they will want to show they were smart and bought the firstest semi with the mostest.
So what do you do? You buy a little tomorrow when it is down, and it will most likely be down because the sellers are too huge to finish offloading their positions in one day. And then you wait until it gets closer to where it reported that monster quarter, say in the $70s, and then you wait. Worst that happens, because you don't do anything all at once you have to buy a little more where it was revalued by those fabulous earnings.
How about the other side? Here again, I am concerned about too much too soon, except this time too much too soon is about the upside. Take Caterpillar's stock. It's up more than 40% for the year. It's at its 52-week high. That's not a good bet at all. Too hot. It's like an egg on a red-hot griddle. You cook it for nine seconds, it's delicious. But you leave it on for 10, throw the darned burnt mess away.
However, if CAT comes in because an analyst downgrades it off the tepid guidance, that's your chance to start buying.
Now just so we know, you can think like this toward so many stocks, the consumer soft goods that are being slaughtered or the big banks that are being bid up every day.
You start small. You get bigger on the way down. And then unlike these hair-trigger hedge funds, you wait for a better moment to buy more. And that's how you can profit with much less risk from the rotations that are roiling our markets.