Are you bullish on a idea or industry?
Maybe you see the tastes of a specific demographic changing before Wall Street can see it.
Or perhaps real estate in your area is booming, but the boom isn’t showing up in your regional homebuilder’s stock price.
All of us have unique vantage points that allow us to see societal trends early, and we can monetize some of these.
Just seeing it doesn’t matter if you can’t take meaningful action, though.
You need to have an accurate, early view and know how to express it in the financial markets. Even better if you can do so in a way that gets you the most leverage on the trend as possible.
Today’s article aims to bridge one of those gaps–finding the right stocks that will help you express your view on a specific theme.
This way, you can create your own custom industry groups that don’t conform to the standard SIC industry codes that most stock screeners like FinViz limit you to.
Step One: What is Your Theme?
The first step here is to clarify what trend you’re capitalizing on.
Most trends we realize are pretty vague, and their significance is unquantifiable if we don’t get more clear about what we’re predicting will grow or change.
For example, let’s say our trend is pandemic-driven migration. People are moving away from crowded cities to get some space in the suburbs or countryside. So there are a few things we might be interested in:
- REITs concentrated in the hot areas.
- Homebuilders concentrated in the hot areas.
- Holding companies that hold real estate in the hot areas
- Home furnishers
- Mortgage financiers
You might want to create a custom industry group composed of stocks within all of the above sub-themes or narrow it down to just one.
For the sake of example, let’s focus on the changing prices of real estate in affected areas–so homebuilders, REITs, and holding companies.
Now we have a more concrete theme: real estate in areas people are moving to because of the pandemic. But to really get the most out of this trend, we need to focus on a specific region.
Step Two: Gather Data
So we’ve narrowed down our trend a bit more, so we know which stocks meet it and which don’t. But we want to gather some data to narrow it down even further.
In our example trend, we’re tracking migration trends created by the pandemic.
So the fundamental question is, where are people leaving and where are they going?
The obvious answer is to use top-down technical analysis to see which regions are trending up and trending down and reverse engineer from there. We could use Zillow’s extensive free real estate data for this.
However, real estate is a very slow market. Trends typically take six months to show up in the data, so we’re going to be late if we use that approach.
Instead, we’re going to look at an excellent survey that Hire A Helper conducted: Which States Were People Moving to in 2020? There’s tons of data in the report, but we’re just going to pay attention to the top winners and losers:
As we expected, expensive and densely populated major cities are losing to more spread out secondary cities.
Specifically, Florida’s gulf coast is a hot area, with four cities making the top ten. Let’s shift our focus here for the sake of simplicity.
I deliberately picked an easy and obvious trend to explain this concept.
Everyone can see the changes the pandemic brought us with their own eyes.
You don’t have to be a professional analyst to make trades off of these insights. On top of that, because the pandemic is the biggest global event in a long time, there’s heaps of data to lean on.
But what if your trend is smaller in scale? Chris Camillo’s trading comes to mind. Camillo is a former hedge fund manager who was just interviewed in Jack Schwager’s newest book Unknown Market Wizards.
Camillo doesn’t use fundamental or technical analysis to find trade ideas. He instead finds micro-trends using social media sentiment tools.
For example, noticing a huge increase in social media conversation around a Disney Frozen toy from Jakks Pacific (JAKK), Camillo realized the toy’s Christmas sales would be way bigger than Wall Street expected.
So he bought calls and made a bunch of money.
Camillo developed a proprietary social sentiment tool called TickerTags for such analysis but only leases it to large institutions. There are, however, several other methods to spot an increase in activity around a theme or company.
Step Three: Search For Stocks
This is where the process ends for most, because there’s no stock market search engine.
Unless you know all of the stocks in the sector quite well, it’s hard to figure out which stocks might meet your trend’s criteria.
In this situation, you’re left Googling for tickers most of the time. You might search for “Florida real estate stocks” and find quickly written articles but no comprehensive list.
When it comes to these types of trends, the small, hidden companies usually have the most leverage. Just a small change in their earnings could multiply the stock. But you won’t find these through Googling for tickers. Here’s my method.
Most stock screeners let you filter by sector or industry. That’s helpful, but our trend spans across several industries most of the time.
In this case, we’re looking for companies that own, operate, or develop real estate on Florida’s gulf coast. Instead, I pay attention to the stock’s “description.”
Every stock has a description that briefly describes the company; where it operates, what it does, who does it, and how it does things. Here’s an example of Apple’s (AAPL) description on Yahoo Finance.
Some stock screeners allow you to search these descriptions. So if you wanted to search for “Florida,” the screener would only return stocks with “Florida” somewhere within its description.
My screener of choice for this purpose is Finbox (disclosure: affiliate link). They let you do precisely this.
Here’s an example screen to find some companies that match our criteria:
- Must trade on a major US exchange
- Industry group: real estate
- Description contains keyword “Florida”
During this process, it helps to have a list of phrases that match your trend criteria. In this case, Florida, gulf coast, west coast Florida, and panhandle are a few examples.
After repeating this process a few times, you should have a pretty comprehensive list of stocks that might meet your trend criteria.
Step Four: Narrow Down
Now we have a list of stocks that might be affected by our trend. Now is the time to narrow them down.
The first step is to read some of the company’s documents to ensure that it really meets what you’re looking for.
We’re not looking to read a whole 10-K here. The best place to start is the company’s Corporate Presentations if they have any. These are basically Powerpoint slideshows that give investors a broad view of the company.
You can find these on the company’s investor relations website. A quick look at one of these will generally tell you whether or not it matches your criteria.
In our example of gulf coast real estate, these companies will typically map out their real estate holdings, showing you where the majority of them are located.
Step Five: Make Checklists
At this point, you should have a pretty short (less than 20) list of stocks, which might be good avenues to express your thesis. But even if your thesis proves correct, there will still be winners and losers within your group.
Unless you’re a hedge fund manager that analyzes companies for tens of hours each for a living, it’s infeasible to do deep due diligence on a few dozen stocks, so we have to thin the herd more.
Ultimately, creating this checklist comes down to the factors you look for in a stock. Here are a few ideas, though:
- How much insider buying by officers?
- How’s the short interest? Is there short squeeze potential?
- How tight is the float?
- How big is the company? Some prefer smaller companies because a small change in earnings could be a game-changer.
- How’s the chart look? Are other traders seeing what you see? Is the stock trending?
- Are the sales and earnings growing? If not, can previous quarters serve as useful comparisons to a bullish quarter?
- Is the company buying back stock?
- Has the company issued guidance?
While seeking out societal trends is an excellent way to find trade ideas, you have to discern if they’ve been discounted by the market yet.
This requires analysis on its own but a good indicator that your trend is discounted is when you hear about on CNBC and from people on the street.
Credit: Warrior Trading