Trading Desk: Only Two Ways To Make Real Money On Wall Street

Times like this are often described as “stock picker paradise.” There’s a hidden trick to that. Yes, if you find the strong stocks, you can do well. But the road to heaven is also paved with avoiding obvious weakness.

I’d like every investor to take a little time this weekend and review the portfolio. Every position should be there for a reason. And if you’re in the market to create wealth, there are only two good reasons to own any stock.

You’re here for growth or you’re here for value. If a company isn’t growing appreciably faster than the market as a whole or the economy, it isn’t really a growth stock.

And if a stock isn’t cheap relative to its peers, it isn’t really a value stock. No portfolio that seeks to outperform the S&P 500 should contain anything that doesn’t flash one signal or the other.

Start with growth. Expectations for the S&P 500 are extremely low at this point in the cycle. Between continued inflation and the Fed tightening so far that banks are starting to pop, we’ll be lucky to see earnings across the market as a whole edge 2% higher by the end of the year.

That’s better than the active declines we’re weathering now, but it’s really just a crawl in the grand scheme of things. Either way, 2% is the benchmark. A company that can’t give us that is simply not a growth company right now.

As much as it pains me, that is not Apple (AAPL), which can’t even give us that minimal positive growth rate this year even if Tim Cook juggles the accounting to the limit.

Amazon (AMZN) only qualifies on a technicality: last year was so bad that any profit at all looks like a miracle. But even if the company hits its targets, earnings are tracking a full 30% below their 2020 level.

Let that sink in. From a profit perspective, AMZN is actually 30% smaller than it was in the early pandemic era. That’s not the invulnerable growth story that drove the stock out of the dot-com era into the trillion-dollar zone.

How about Microsoft (MSFT)? Earnings might end up a full 1% above 2022 this year if management does everything right. Positive movement is great, but you could just buy the S&P 500 and get double the growth.

There are a lot of companies that are growing faster than the broad market. They’re smaller and often obscure . . . they haven’t had their decade of glory yet.

A lot of them are also deeply oversold after the bear took its bite, but they’re still trading at earnings multiples that reflect their expansion rate. They trade at a premium.

The theory is that the companies can grow into their stocks in a relatively short period of time, which reduces the risk shareholders accept that something will go wrong in the meantime. Otherwise we’d get nervous about projecting historical growth rates into the future any longer than necessary.

Under normal conditions, I look for an earnings growth rate bigger than the price-per-earnings multiple. But right now, with the broad market trading at 17X earnings despite its miserable projected growth, the line gets a lot blurrier.

The broad market is not a growth play right now in my book. Nonetheless, any stocks in your portfolio that are currently priced above 17X earnings need at least 3-4% growth to earn their keep in the near term.

If they don’t have that growth on the horizon, maybe they’re really value stocks right now. Again, with the S&P 500 at 17X earnings, the bar here is low.

But MSFT commands a 30X multiple against its 1% projected growth this year. That’s not cheap. It’s ridiculous.

AAPL is 25X right now. Not cheap for a shrinking company. And while AMZN is bouncing back from last year’s slide into operating losses, I’m not sure it’s going to justify its 67X multiple any time soon.

Where is the real value? We’re finding it in Big Oil and similar stocks that have simply been pushed too far ahead of the fundamentals. Probably not the banks yet.

We’re finding it every day in the options market. Pick the right contract and capture 20-30% upside when Wall Street realizes how cheap those calls are.

I’d start with 15X earnings as a screen. If your “value” stocks aren’t that cheap, you’re not really holding value.

And if a stock isn’t cheap or growing fast, it’s unlikely to make you a lot of money. You’re not going to generate a lot more wealth in those names than you’d get from the S&P 500 in the coming year.

The only exception is when you don’t want to generate more wealth than what you already have. If you’re more interested in wealth preservation, feel free to gravitate toward defense . . . you might not make a lot, but you won’t lose a lot of ground in the long term either.

Even defense can be dead money. Treasury debt pays around 4% right now. That’s what you get for zero risk. If your defense can’t do that, it’s a weak defense.