EP 5:  Anatomy of a Winning Stock

EP 5: Anatomy of a Winning Stock

September 18, 2019

Louis Llanes, founder of Wealthnet, walks through examples of the best performing stocks and what their characteristics are prior to producing exceptional returns over a multiple year period of time.  Louis talks about the primary things Wealthnet looks for to invest in these types of companies.  He then runs through a list of criteria that are common to winners including profitability, top-line and bottom line growth, financially healthy balance sheet, a strong niche that wins over the competition, and strong quantitative price trends.

The first example is Align Technology who makes Invisalign, a technology and process to align teeth.  It is an alternative to braces and has some distinct advantages.  Louis briefly discusses the profitability path, revenue growth and the stock price movements common in winners.  He also discusses the valuation ratios and how they appeared expensive compared to the general market, yet the company excelled and thrusted forward.  He discusses how companies that are losing money but are growing rapidly can move into profitable territory and through operating leverage which generate higher percentage growth figures in profits.  He discusses that these companies can be good investments even if the current financials show losses, but there must be a visible path to profitability in the near future.  The sales growth is critical for these companies.

Louis identifies how Align Technology owns the category of invisible alignment for teeth so much so that their name is synonymous with the category.  The importance of how the company created a category that is more precise to align teeth through new technology and thus create a “better mousetrap”.

Louis differentiates between the quality, valuation, and technical conditions that Wealthnet uses for the Fundamental Core strategy as opposed to the Dynamic Growth strategy.  The Dynamic Growth strategy does not emphasize valuation as much as the Fundamental Core strategy because these companies are growing much faster and will command a higher multiple to earnings, cash flow, and net assets.

The attention is then focused on the balance sheet and the structure that shows strong cash liquidity, low debt, and from the cash flow statements, the company should have cash flow increases all the way to the pockets of the shareholders after paying all expenses and debt holders.

Louis shows example of quantitative price trends and how the add to the recipe used by Wealthnet to attempt to more effectively trade the company stock.  He shows various breakouts, range expansion, and risk parameters to seek to limit the downside risk.  He also discusses exiting and taking money off the table while managing a trade.  This includes profit taking when a stock moves up very quickly in a short term and is ahead of itself based on a large sample of statistics of publicly traded stocks.  He clarifies that if the fundamentals are still in place and the trend is point higher, the stock is not completely sold, but just paired back and so an investments remains to profit if the stock continues to rocket higher.  He discusses cutting losses, letting winners run and diversification including proper position sizing for portfolio construction.

Lastly, a group of stocks are reviewed showing their trends and choppiness.  The importance of getting back into a stock as long as the fundamental criteria remain in place and the trend resumes higher.  It is OK to get back into stocks.  Louis discusses how Microsoft was dead money for many years after the dotcom bubble and then the company came back to life.  He discusses how companies can go through phases.  Many times, good investments are not sexy.  An example is Autozone.  The importance of constantly screening the market looking for positive trends and how technical analysis can find companies early because the price actions of relatively unknown or under-owned companies can be found before the institutional crowd has loaded up on the stock.  He discusses how the solar companies have been recently breaking out but are losing money.  The importance of managing risk with younger companies when they are not working is paramount.