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The October Scorecard — and November’s Top Watchlist

by | Nov 1, 2022 | Market Outlook

Dear Investor,

My daughter was sick on Halloween for the third year in a row. She is 4 years old and has now missed trick-or-treating due to the COVID-19 shutdown, a battle with the flu and strep throat.

She doesn’t actually know what she is missing.

The good news is that I didn’t have to walk the neighborhood and carry candy…

That’s fortunate — as it was 95 degrees in my costume…

picture of a man in an inflatable costume

Now… I know what you’re thinking.

In fact… I really hope that you’re thinking — am I taking insight from THIS GUY — dressed like the inflatable man at the parking lot?

Based on what I’m about to show you — my October F&Z score report card…

I think you should…

Finding Great Picks for Your Portfolio

As you know, I specialize in value, momentum, insider buying and anomaly strategies across various finance disciplines. I have a momentum indicator that I give away for free each day — a Daily indicator — that has helped time dramatic rallies and pullbacks all year.

In fact, the indicator went positive in early October — just as executives loaded up on their own stocks.

The blue line below is the five-day moving average of insider executive buying to executive selling by dollar amount…

Sharp upticks in this indicator typically precede rallies — as they have in late January, mid-June, mid-July and early September. Our most recent pop came ahead of October’s rally.

Let’s Take a Look at a Simple Watchlist – And The Strategy

At the start of each month, I examine three unique metrics to help build a list of low-risk, high-upside stocks with rock-solid balance sheets.

This is one of the most conservative strategies I have. But it’s great for first-time investors and options traders. That said, I know plenty of advanced traders who also love to employ this strategy in positive momentum markets.

And this is free.

I know people who charge thousands of dollars for some of this analysis — which is silly. You just need to know how the data works, and I’m doing most of this research. Sharing it with you helps me master it.

So let’s take a look at our metrics. We have…

  • The Piotroski F-score.
  • The Altman Z-score.
  • A valuation rank.

Our first metric — the Piotroski F-score — gives us a clue into positive financial growth and low debt exposure.

The F-score is a NINE-POINT system that rewards each company for meeting a certain criterion on its balance sheet. It was created by a Stanford and University of Chicago professor named Joseph Piotroski.

If the company meets all nine criteria, it has an F-score of 9. That means its balance sheet has greatly improved year over year.

Then we have the Altman Z-score…

This measurement is a weighted average of five different metrics to determine whether a company might go out of business. If a company falls below 2.6, it has a risky balance sheet.

That risk is tied to a balance sheet with lots of debt or weak cash flow. We are looking for stocks with a Z-score of 3 or higher. That severely reduces any credit concerns I have.

Finally, we want to add a valuation metric. Different industries require different valuation methods. So I’m not going to share this — it’s my secret sauce.

These stocks are cheap compared to their own historical valuation and/or to their sector rivals.

This is the List that We Built for October

Now look at the list below, including the metrics we had at the start of the month. There are nine names here.

The gains here are solid — but not world-beating on the surface.

But it’s important to understand that the best strategy around these stocks doesn’t include buying them. If you use a simple options strategy, you could have blown away the returns of the S&P 500 in October.

How to Trade These Stocks

If you want to start trading these great names, you don’t have to buy the stock or call options. Go deep out of the money on puts and trade credit spreads.

I’ve discussed various approaches to these stocks that offer unique upside and reduced risk. Again, with these trades, you can improve your probability of profit, generate large income payments from a small position, and pick your preferred entry buying price.

And what happens with these trades?

If the stocks go higher, you’ll make money. You’ll also make money if the stocks don’t reach the strike price. And if the stock falls to the strike price, you’ll get a great stock at a much cheaper valuation than today.

It’s “win, win, win.”

So, What About November?

I know you’re curious about the stocks on the list for November. Here they are.

Tomorrow, we’ll find a trade for one or two of these stocks. I highly recommend we focus on the Energy sector — although, I’m expecting a bit of a pullback/buying opportunity due to recent overbought conditions in the sector.

 

 

To your wealth,

Garrett signature

Garrett Baldwin

WRITTEN BY<br>Garrett Baldwin

WRITTEN BY
Garrett Baldwin

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