Cash flow never lies. That is the tagline for my new trading vehicle, Excelsior Capital Partners. As I am learning how difficult it is to set up corporate trading platforms --brokerages make it as difficult for companies as it is easy for individuals to form accounts -- Excelsior's cash flow is actually being aided by these delays.
I really want to start shorting wildly overvalued stocks, but the market really keeps going up, its latest leg through 3000 and 27000 driven by yet more dovish talk from Fed Chair Jerome Powell. Eventually, my paperwork issues will be resolved, and I will start trading, but in the meantime, I have had the chance to do some real, old-fashioned equity research, including spending hours in front of a Bloomberg terminal this week.
It felt good to go back to my old chops as a research analyst, and while I can't share the full fruits of my labor with Real Money readers, I can give you some qualitative findings from my work. The actual numbers are proprietary to Excelsior, but I will share some of the most egregiously overvalued stocks that I found through basic ratio screening. Again, I can't reveal the exact contents of my secret sauce, but my screens are cash flow-based and focus on free-cash flow as the guiding metric for valuing any company. As I keep saying, cash flow never lies.
So, when screening for slightly different metrics, the individual stocks to target are the ones that show up in multiple categories. Here are a few:
Intuitive Surgical (ISRG)
Hon Hai (HNHPF)
Screens are a great way to narrow one's focus, but after the results are generated, it is still necessary to perform fundamental analysis. I won't belabor the individual fundamentals for the aforementioned companies, especially Tesla, a stock on which I have made my feelings abundantly clear in many Real Money columns prior to this one.
One takeaway, though, is that this market has a pronounced insensitivity toward normal valuation limits on what are deemed to be "hot" sectors. Medical devices and cloud-based software-as-a-service are two such sectors. My screens, as seen in the selections above, are filled with companies on those two industries.
That is the way the way to win at this game. Elon Musk's shenanigans will always be a source of amusement to me, but the universe of electric car companies is really only two stocks: Tesla and Nio (NIO) . To effectively generate profits, a trader must pick at least a handful, if not two handfuls, of companies in a sector and short the whole bunch. That "shotgun" method protects from losses produced by stocks' reactions to idiosyncratic, company-specific events. So, if I am going after ServiceNow, I am going to hit Atlassian (TEAM) , Workday, Slack (WORK) and a few others at the same time. Similarly, ISRG is valued in a way that I have never seen in 27 years of analyzing stocks, but when I bet against it I will also bet against Stryker (SYK) , Boston Scientific (BSX) and other device names.
I will have more short ideas in my upcoming Real Money column.