Today, Bryan answers one question that every investor is constantly wondering: “How can I decide which stocks to buy?”

To learn more about Bryan and his team’s mission at MTA, check out their website here.

– James Ogletree, Senior Managing Editor

One of the most common questions I get as a trader is…

“How do I know which company to trade?”

The truth is…

There are thousands of tickers out there, and it’s easy to get overwhelmed.

You’ve also got fear-based news headlines and social media hype hitting you on your smartphone and computer all day.

Overall, it can be difficult to know which strategies will actually lead to consistent gains.

But over my 20+ years as a trader, I’ve developed some tried-and-true methods for finding the best buy opportunities.

Here are 3 key factors I look for before trading a company.

Use these and watch your trading confidence skyrocket.

No. 1 – Notice the product in the real world

The first thing I look for when trading a stock is real world value.

For example, say I’m at a coffee shop, and I notice a lot of people wearing a certain kind of shoe.

That’s a strong buy signal because that company has demand.

This is especially true with women’s spending trends.

Women make up 70-85% of household purchases, so noticing what women are buying is one of my staple strategies for finding companies worth trading.

Start looking for these consumer trends and you’ll be ahead of 90% of other traders.

No. 2 – Look for an upcoming catalyst

A catalyst is a known date/event that could determine whether the market is bullish or bearish on a company.

These catalyst events include quarterly earnings reports, product launches, mergers, buyouts, ETF inclusion, and FDA approvals.

Before these events happen, you’ll often see traders buying, shorting or hedging a stock.

Then, the market digests the outcome and a stock either spikes or falls.

Keep in mind – this is not about guessing what’s going to happen to a stock ahead of earnings. However, when you’re aware of these events – you can position yourself in a way that increases your likelihood of a winning trade.

No. 3 – See if the company has strong institutional backing

Another factor I look for is institutional backing.

Institutional backing is when big players – mutual funds, hedge funds, pension funds – all put serious money behind a stock and hold it in size.

For example, before tech group Nvidia’s big run in 2023, it had whale funds like ARK Invest, Fidelity and BlackRock all with large positions.

This institutional capital acts as a liquidity base (price support) and a confidence signal for other funds.

Another term traders should get familiar with is “Supply burn.”

Supply burn is when the available float (shares that are available to trade) gets reduced or locked up.

For example, say company insiders use their own profits to buy shares of a company (also known as buybacks).

By doing this, they destroy the supply because the number of shares available to the public shrinks.

With low supply, this creates a squeeze effect where any catalyst (like earnings) could ignite major momentum.

Think of float like the kindling… and the catalyst is the spark that could light up a stock.

The post 3 Signals That a Stock Is a “Buy” appeared first on Wealthy Retirement.

Chief Income Strategist Marc Lichtenfeld is a huge fan of companies with strong and growing cash flow. Anyone who’s spent just a few minutes around him knows that.

If you think I’m exaggerating… think again.

Marc recently told me a story about a salesman coming to his house to sell a certain company’s products. When Marc heard the name of the company, he replied, “Oh, I’ve heard of it. Great company. Generates a ton of cash flow.”

(The salesman, of course, wasn’t sure how to respond.)

Last week, Marc sat down for an interview with our friends at MarketBeat to discuss why investors should pay much more attention to cash flow than earnings.

He also gave away the names and tickers of two potential diamonds in the rough to buy now and two “ticking time bomb” stocks to avoid:

• An established drugmaker whose free cash flow is projected to triple this year
• An under-the-radar way to get exposure to the AI space
• A household name (literally) that has been bleeding billions of dollars for the past decade
• A company that he says is “complete garbage” and whose earnings are “a joke”!

Click the image above to watch the full interview and get the details on all four stocks!

The post 2 Stocks to Buy That Are Swimming in Cash appeared first on Wealthy Retirement.

I was just starting my job as a sell-side analyst. I was building financial models in Microsoft Excel, changing one variable to see how it would affect the others.

As I was playing with the spreadsheet and changing all of the things that don’t really affect the business, like depreciation and shares outstanding, I saw how much earnings were affected.

It was pretty profound. That showed me there were ways that a CEO could easily manipulate earnings and tell the story that they wanted to tell. Yet you couldn’t do the same with other metrics.

Earnings are nice, but they don’t always tell the story of how the business is actually performing.

Think about it in relation to your own finances. Your taxable income may be affected by things like mortgage interest, mileage driven to a job, professional dues, and subscriptions. You factor all of those things in and then report to the government what your taxable income is.

But that doesn’t accurately represent how much money you brought in during the year. Mileage is not a direct cost. Perhaps your brother-in-law finally paid you back the $1,000 you loaned him. Those things affect the actual amount of money you have available, which is a much more meaningful number when you’re trying to set a budget or figure out how much to save or invest.

This concept has big investing implications.

Pacer ETFs conducted a study of the largest 1,000 stocks in the market as measured by the Russell 1000 over the past 34 years. I won’t go into all the details of their calculations, but in short, they used a metric that shows how much cash a company generates, adjusted for its market cap and debt.

The study found that companies that ranked in the top 10% in this metric generated the highest returns. In fact, the stocks’ performance matched the companies’ ranks exactly.

Tech darling Broadcom (Nasdaq: AVGO) is a great example of the pitfalls of blindly following earnings. Ten years ago, not many people were paying attention to this chipmaker. Profits swung to a net loss of $1.7 billion in 2016 and continued to bounce around over the next several years.

If you were only focused on earnings, you might have bailed in 2016 when earnings went negative… or in 2019, when they fell by 78%… or last year, when they dropped by 58%.

You would have missed out. Bigly.

Over the last 10 years, an investment in the S&P 500 would have more than tripled. Over that span, $10,000 would’ve turned into $34,549 with dividends reinvested.

A $10,000 starting stake in Broadcom would have turned into $339,986 with dividends reinvested. The price appreciation alone would have been worth $195,727.

Don’t get me wrong – I like earnings. I also like ice cream. But both are not that important to me. There are other indicators that tell me whether a company is worth investing in. If certain metrics aren’t trending in a positive direction, I’m not interested, regardless of what earnings are doing.

In some cases, I actually like when earnings are negative, because chances are most investors have passed over the stock.

Be sure to add some more indicators into your toolbox other than earnings. It will greatly improve your investing performance.

The post The Danger of Blindly Following Earnings appeared first on Wealthy Retirement.

For those of us who work in the financial industry, the beginning of earnings season is right up there with Fourth of July fireworks, a legendary Thanksgiving dinner, and waking up on a snowy Christmas morning. (Well, maybe not. But it’s close.)

Why is it such a big deal, you ask? Because positive earnings news can be like rocket fuel for a stock… and negative news can be like quicksand.

More than 40 companies in the S&P 500 report earnings next week, more than 100 do so the following week, and more than 150 the week after that. Needless to say, you’ll be reading and hearing the word “earnings” a lot in the financial media for the foreseeable future.

With that in mind, I wanted to send around this episode of Chief Income Strategist Marc Lichtenfeld’s YouTube series, State of the Market, where he explains how to make sense of earnings estimates, beats, and misses, Wall Street’s “Buy,” “Hold,” and “Sell” ratings, and – most importantly – how to determine the best way to navigate earnings season based on your personal investing goals.

Click the image above to watch Marc’s guide for mastering earnings season (featuring a cameo from renowned financial expert Cosmo Kramer).

The post Marc’s Guide to Mastering Earnings Season appeared first on Wealthy Retirement.

Today, in the spirit of “teaching a man to fish,” I’m taking you behind the scenes to show you exactly how I determine the safety of a company’s dividend.

As far as I can remember, I’ve never outlined my full Safety Net criteria before, so I’m eager to share the details with you.

The first thing I look at is free cash flow.

I focus on free cash flow rather than earnings because earnings include all kinds of non-cash items and are easily manipulated.

For example, earnings can include revenue that has been recognized but not received. Let’s say a company books a $1 million sale on December 29. Those funds would count toward the company’s revenue for the year, and that revenue would then trickle down the income statement, with a portion of it being added to earnings.

However, the company sends the invoice on December 30 and, as of December 31, has not been paid.

That $1 million still counts toward the year-end revenue and earnings totals, but it won’t be reflected in free cash flow because the company has not received the money yet.

Another example is stock-based compensation. When a company grants stock to employees, it is counted as an expense that lowers earnings. But no cash went out the door, so it doesn’t affect cash flow.

In short, cash flow is how much cash the company actually brought in (or sent out).

When it comes to evaluating the safety of a company’s dividend, we want to see that the cash the company generated is enough to cover the dividend. That’s because dividends are paid in cash, not in “earnings.”

The best way to determine whether the cash is sufficient to cover the dividend is by calculating the company’s payout ratio, or the percentage of its free cash flow that it pays out in dividends. (Most people use earnings to calculate payout ratio, but I prefer free cash flow for the reasons I explained above.)

We calculate free cash flow by going to a company’s statement of cash flows and subtracting its capital expenditures from its cash flow from operations.

Below is McDonald’s‘ (NYSE: MCD) statement of cash flows from its 2023 annual filing with the SEC.

The key numbers we’re looking at are cash provided by operations, capital expenditures, and common stock dividends.

You can see that cash flow from operations was $9.612 billion and capital expenditures (sometimes known as “capex”) were $2.357 billion. To arrive at our free cash flow figure, we subtract capex from cash flow from operations. McDonald’s’ free cash flow comes out to $7.255 billion.

Then we look at common stock dividends, which totaled $4.533 billion.

This tells us that McDonald’s paid out $4.533 billion out of the $7.255 billion that it generated in cash. That’s a payout ratio of 62%.

If we’d used the $8.469 billion earnings figure (shown in the “net income” row at the top of the page) to determine the payout ratio, the payout ratio would’ve been 54%.

But remember, dividends must be paid in cash, so we’re not interested in what percentage of earnings the company paid out in dividends. We need to know what percentage of its cash was paid out in dividends.

In Safety Net, my payout ratio threshold for most companies is 75%. If the payout ratio is above 75%, I no longer have confidence that the company could afford its dividend if it were to hit a rough patch or its cash flow were to decline. But if the payout ratio is below 75%, the company has a decent buffer to protect it if it has a bad year.

However, there are some exceptions to my 75% rule. I allow real estate investment trusts (REITs), business development companies (BDCs), and partnerships to have payout ratios of up to 100% because they are legally required to pay out 90% of their earnings. For that reason, they usually have higher payout ratios than other companies.

Also, we use a different measure of cash flow for these types of companies. For REITs, we use funds from operations (FFO), for partnerships, we use distributable cash flow (DCF), and for BDCs, we usually use net investment income (NII). For banks and mortgage REITs, we use net interest income.

When I’m determining my Safety Net grades, every stock starts out with an “A” rating and then gets downgraded depending on several factors.

Safety Net looks at both the previous year’s payout ratio and the current year’s expected payout ratio. The stock gets downgraded for each one that’s above 75% (or 100% for REITs, BDCs, and partnerships).

This year, McDonald’s’ payout ratio is forecast to drop from 62% to 53%, which is still well below my threshold.

I also look at cash flow growth. If cash flow has declined over the past year or past three years or is expected to fall in the current year, the stock’s safety rating will be downgraded.

McDonald’s had a big jump in free cash flow in 2023, so its one- and three-year growth rates were positive. Free cash flow is forecast to increase this year as well.

Lastly, we look at the company’s dividend-paying track record over the last 10 years. For each dividend cut in that span, the dividend safety rating gets downgraded by one level. If the company has raised its dividend in each of the last 10 years, it will get a one-level upgrade, because that tells me that management is committed to sustaining the dividend even if the financials get troublesome.

McDonald’s has no dividend cuts in the past 10 years. In fact, it has raised the dividend every year for the past 49 years, so it gets a bonus point.

To sum it up, each stock begins with an “A” rating and a score of 0, but its grade is adjusted based on the following factors:

• Previous year’s payout ratio above 75% (or 100% for REITs, BDCS, and partnerships): -1
• Current year’s expected payout ratio above 75% (or 100% for REITs, BDCS, and partnerships): -1
• Negative cash flow growth over the past year: -1
• Negative cash flow growth over the past three years: -1
• Negative expected cash flow growth over the next year: -1
• Dividend cut within the past 10 years: -1 per cut
• 10 years of consecutive dividend increases: +1.

If the company ends up with a score of 0 or 1, it gets an “A.” If its score is -1, it gets a “B.” A score of -2 earns a “C” grade, a score of -3 gets a “D,” and a score of -4 or below gets an “F.”

McDonald’s’ payout ratio was within my comfort zone last year and should remain there, its free cash flow has been growing and is expected to continue growing this year, and it has no history of dividend cuts in the past 10 years.

With no downgrades, the stock gets an “A” for dividend safety.

Now you know how the Safety Net sausage – or, in this case, Sausage McMuffin – is made. But feel free to continue letting me know what stocks you’d like me to analyze here in Safety Net. Just leave the ticker symbols in the comments section below.

Dividend Safety Rating: A

The post The Safety Net System: How I Evaluate Companies’ Dividends appeared first on Wealthy Retirement.

Hello and happy earnings season!

On Tuesday, I joined Oxford Club CEO Todd Skousen in The Oxford Clubroom (our interactive video platform) for an hour-long chat about my five keys to playing earnings.

For time’s sake, I created a shortened version that focuses on the most important parts of the session. You can watch it by clicking the thumbnail above. (Todd recaps all five of my earnings tips near the end of the video.)

As you’ll see, I even discussed a bonus sixth tip that’s based on a shockingly consistent market anomaly my team and I just uncovered.

I think you’ll find it especially useful (and timely!).

Just click the image above to tune in.

The post Research Reveals Shockingly Consistent Market Anomaly appeared first on Wealthy Retirement.

Chief Income Strategist Marc Lichtenfeld is everywhere these days!

We just wrapped up our 26th Annual Investment U Conference in Ojai, California, where Marc gave presentations on his 10 big predictions for 2024, his favorite bonds to own right now, how to invest regardless of who wins the presidential election and more.

He also recently sat down with our friends at MarketBeat to chat about various topics related to income and building wealth. During the 15-minute interview, Marc discussed…

• What he says is the greatest force to help you grow your wealth
• How to tell which high yields are reliable and which ones are too good to be true
• The mistake many investors are making that’s hurting their portfolios
• Two of his favorite dividend stocks right now: a leader in the biotech sector and a telecom company that just raised its dividend for the 46th quarter (yes, quarter!) in a row
• His latest thoughts on interest rates and the current “sweet spot” in the bond market.

Click here to watch the full interview, or click on any of the links above to jump to those specific topics in the video!

The post Tools of the Trade: Marc’s Best Income Secrets appeared first on Wealthy Retirement.

Our mission has always been to deliver you fresh, compelling ideas from the best and brightest minds in the financial world – and the newest member of our team fits that description to a T.

Please join me in welcoming The Oxford Club’s new Director of Trading… Anthony Summers.

Anthony’s name may already be familiar to some of you. He was the Club’s Senior Research Analyst for several years before taking a position with our colleagues at Manward Press, and we’ve featured his insights in Wealthy Retirement on multiple occasions.

And when we had the opportunity to bring him back on board, we jumped at the chance.

Starting today, Anthony will be contributing to the Club in a variety of ways, including taking over our weekly Value Meter column.

Leave a comment below to let him know what stocks you’d like to read about and to welcome him (back) to The Oxford Club!

– James Ogletree, Managing Editor

In 1991, a book was published that some view as the holy grail of the investment world. Yet it never came close to being a New York Times bestseller.

Printed in a modest batch of 5,000 copies, the book was a sales dud. And it was never reprinted after its initial publication.

However, over 30 years later, an unsigned copy may fetch upward of $2,500 – a hundredfold increase over its original $25 price tag.

What makes this rare book worth more than a troy ounce of gold, you ask?

It’s not its cover design or its dry title. Rather, it’s the investing philosophy laid out by its author, one of the most successful fund managers alive.

Billionaire fund manager Seth Klarman’s Margin of Safety breaks down the value investing principles used by the most successful and wealthiest investors in the world, including Warren Buffett, the late Charlie Munger and Joel Greenblatt.

And with his hedge fund, The Baupost Group, having notched returns of about 20% annually since 1982, Klarman’s own track record speaks for itself.

He writes on Page 107 of his book:

“The entire strategy can be concisely described as ‘buy a bargain and wait.’ Investors must learn to assess value in order to know a bargain when they see one. Then they must exhibit the patience and discipline to wait until a bargain emerges from their searches and buy it, regardless of the prevailing direction of the market or their own views about the economy at large.”

In practice, this tends to mean that value investors take the long way around to market outperformance, resisting the allure of popular short-term trends in the market in favor of lower-risk – yet, arguably, higher-reward – alternatives.

In today’s Value Meter, I want to assess one such opportunity: a stock that’s in Klarman’s own portfolio.

Clarivate (NYSE: CLVT) is hardly a household name. It’s an information services company that focuses on providing insights and data analytics tools to businesses and professionals.

Most investors would take one look at the stock’s price trend and be immediately turned off. It’s been badly bruised and battered over the past few years.

But the fact that this stock is trading for a mere $9 isn’t enough to make this a value play. Nor is it the sole reason Klarman’s Baupost Group owns over 25 million shares of the stock.

Let’s dig deeper.

For starters, the company has seen some sizable revenue growth in recent years.

From 2017 to 2022, which is the last year for which we have data, revenue rose by an annual clip of 24%. And EBITDA (earnings before interest, taxes, depreciation and amortization) largely followed suit, growing by nearly 53% a year.

But a more important measure to consider is operating cash flow. It tells us very plainly how much cash a business is generating from its core operations, and it’s harder to manipulate using accounting gimmicks.

On that note, Clarivate is a rarity in today’s market. Not only is it cash flow positive, but its cash flows have grown very strongly.

In the same five-year period, operating cash flow has risen at a staggering annual pace of 138%. And the company is likely to report clearing $700 million in 2023.

In short, this business isn’t nearly as dead in the water as its stock chart might suggest. Despite some earnings setbacks, business is moving in the right direction.

Clarivate currently sports a price-to-book (P/B) ratio of about 1.1, which means it is trading at a better value than 70% of publicly traded stocks.

Its price-to-cash flow (P/CF) ratio sits at around 8.9, which puts it in the 55th percentile among publicly traded stocks.

As we’ve seen with Klarman’s book, the intrinsic value of things – investments included – is rarely obvious. Oftentimes, the ugly, unpopular or obscure opportunities hold the most long-term potential.

For value investors willing to tune out the noise and bide their time, Clarivate hits all the right notes.

In short, falling out of favor has a silver lining. This is the kind of opportunity that would make even Seth Klarman take notice.

The Value Meter rates shares of Clarivate as being “Slightly Undervalued.”

The post Clarivate Is a Cash Flow Machine! appeared first on Wealthy Retirement.

No, the biggest stock market winners are tremendous growth companies that were purchased at reasonable values.

There is no disputing the fact that earnings growth is what drives stock performance over the long term.

Average companies don’t have a lot of growth. But great companies grow at a high rate for years and years.

Over a long period of time, your entry price on a stock is dwarfed in importance by the earnings growth the company can generate.

As an investor, I’ve not done well with technology stocks. It isn’t that I lose money owning them; it’s that I often think they are too expensive to buy.

Getting locked on valuation metrics has caused me to miss far too many great long-term growth stocks.

This week, I’ve got a technology stock for you that has a ton of earnings growth ahead of it and could be the rare tech stock that’s undervalued right now.

So let’s run it through The Value Meter.

The company is Alight (NYSE: ALIT).

Alight provides software solutions for payroll, health and benefits processing for large enterprises.

Over the past couple of years, Alight has made a significant investment in its business by upgrading to a cloud-based platform.

That investment is now set to pay off handsomely.

When I started researching the company, the first number that really got my attention was its 98% customer retention rate.

Alight signs three-to-five-year contracts with its customers (with protection from inflation built into the agreements) and gets paid on a per-employee basis.

Every new customer gets added to an ever-growing revenue stream, and a 98% retention rate means the company’s revenue is extremely sustainable.

It is very hard for a company to grow its revenue if it is constantly losing customers. And Alight basically never loses customers.

Alight’s growth engine is also ramping up.

In the company’s “Investor Day” presentation in September, it reported that its revenue had grown from $2.9 billion in 2021 to $3.3 billion over the trailing 12 months, a 14% increase in less than two years.

More importantly, cash flow from operations nearly tripled from $115 million to $330 million over the same span.

With Alight having fully completed its move to a cloud-based platform, I expect the company’s rates of revenue growth and cash flow growth will continue to increase.

But that’s only half the battle… What about its valuation?

The consensus earnings per share estimate for Alight in 2024 is $0.73.

Based on its current share price of $9, that means Alight is trading at just 12.3 times earnings.

It’s pretty rare that I see a chance to get a good technology business at less than 20 times earnings. With that in mind, Alight’s valuation looks great.

Alight is a company that is growing at a good clip, operates a high-margin software business and almost never loses a customer relationship.

Continued earnings growth should drive this stock higher in the months and years ahead.

The Value Meter rates Alight as being “Slightly Undervalued.”

If you have a stock that you’d like to have rated by The Value Meter, leave the ticker symbol in the comments section below.

The post Is This the Only Cheap Tech Stock? appeared first on Wealthy Retirement.

But can the Israeli company keep it up?

Over the last four quarters for which we have data (the company has not yet released its fourth quarter results), Magic Software generated $80 million in free cash flow. It paid $30.8 million in dividends over that span for a nice low payout ratio of 39%.

That means the company is paying out just $0.39 in dividends for every dollar in free cash flow, so it can comfortably afford its dividend. (Remember, I use free cash flow rather than earnings to calculate a company’s payout ratio because it’s easier for management to manipulate earnings numbers.)

Magic Software is a small cap stock with a market cap under $500 million. As a result, only two sell-side analysts cover the stock, and they have not published free cash flow estimates for 2024. So we’ll have to make our own assumptions.

Earnings are projected to be flat this year, while revenue is forecast to decline by 10%. Since earnings are expected to be flat and management has not provided any guidance so far, we’ll assume that free cash flow will also be flat.

The company has reduced its dividend a few times in recent years. In 2022, the dividend dipped from $0.234 to $0.216 per share, and in 2020, it was nearly cut in half from $0.156 to $0.08 per share.

All in all, there have been seven cuts in the past 10 years, with the others coming in 2014, 2015, 2016 and 2019. So while the overall trend has been higher, there have been periods when the dividend was reduced for a short time.

The company can easily afford its dividend based on the trailing 12 months numbers, but it has shown a willingness to cut the dividend on a fairly regular basis.

Even if Magic Software sustains its dividend in the near term, I wouldn’t get too comfortable with it.

Dividend Safety Rating: D

If you have a stock whose dividend safety you’d like us to analyze, leave the ticker symbol in the comments section below.

You can also take a look to see whether we’ve written about your favorite stock recently. Just click on the word “Search” at the top right part of the Wealthy Retirement homepage, type in the company name and hit “Enter.”

Also, keep in mind that Safety Net can analyze only individual stocks, not exchange-traded funds, mutual funds or closed-end funds.

The post Will Magic Software Cut Its 6.7% Dividend Yield? appeared first on Wealthy Retirement.