Sometimes, investment ideas can come from monitoring trends. This week, we noticed a new trend appears to be at work. Combining this with some other long term trends in the market results in a short list of stocks that could be among the market’s biggest winners in the short run.
One of the long term trends in the stock market is the increasing importance of global economic diversification. This can be applied to stock selection by analyzing a company’s sales. Companies with a significant amount of foreign sales will be the global companies poised to benefit from this trend.
Testing the Value of Foreign Sales for Large Companies
According to FactSet, a research firm, “coming into the Q3 earnings season, companies in the S&P 500 with higher global exposure are expected to benefit from the tailwinds of a weaker U.S. dollar and higher global GDP growth.”
The research firm maintains a database showing Geographic Revenue Exposure based on the most recently reported fiscal year data for each company. In a recent research report, stocks were divided into two groups: companies that generate more than 50% of sales inside the U.S. (less global exposure) and companies that generate less than 50% of sales inside the U.S. (more global exposure).
Further analysis was then done to find that companies in the S&P 500 with higher global revenue exposure are expected to deliver stronger growth in sales and earnings than S&P 500 companies with lower global revenue exposure.
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The results are summarized in the chart below which shows expected growth rates for the earnings season which is currently underway.
The results are actually rather dramatic. Companies with a majority of sales in the US are expected to report a contraction in earnings and sluggish growth in revenue. Companies with a majority of sales outside the US account for all of the expected growth in earnings in the index for this quarter.
Generating Trading Ideas From That Research
While this is useful information, it is possible the information could be even more powerful when applied to stock market trading at lower prices than those in the S&P 500. This can be done by limiting our search to low priced stocks. These stocks are likely to deliver the largest short term percentage gains.
To find potential buy candidates, we can screen companies using the free screening tool at FinViz.com. This tool allows us to find companies meeting a variety of criteria. For this screen, we will look for low priced stocks with substantial global exposure.
FactSet is a more sophisticated data analysis tool and has significantly more capabilities than free tools. To find companies with foreign exposure, we will need to use a different approach than the one applied in the study summarized above.
We will limit our search to companies traded on US exchanges that are headquartered outside the US. This will allow us to find companies which are likely to experience most of their growth outside the US.
The fact that they are headquartered in other countries indicates they have significant business operations there. The fact that they are listed and available for trading in the US shows that they also have substantial operations in this country.
We will also search for stocks trading below $5 because stocks at this price are more likely to deliver large gains, in percentage terms, than stocks trading at higher prices. We will also limit our search to stocks with a significant amount of institutional and insider ownership, at least 20% on each measure.
High institutional ownership shows that large investors have done research on the company and determined that it is a buy. Large insider ownership shows us that that the managers of the company have faith in its operations.
Without access to more sophisticated research tools, these two factors can tell us what the research reports likely say. Institutions tend to sell when research reports are neutral to negative. Insiders tend to sell when long term prospects dim.
Finally, we limited our search to stocks with low volatility. We used beta to measure volatility and required the stock to have a beta of less than 1. This avoids the most volatile stocks which carry higher than average risk of loss.
The exact criteria we used are shown in the chart below.
The list includes six stocks.
EXFO Inc (Nasdaq: EXFO) is a leading provider of next-generation test and service assurance solutions for wireless and wireline network operators and network equipment manufacturers in the global telecom industry. This company also provides mobile communications intelligence tools for police, armed forces, and other governmental organizations to fight organized crime and terrorists.
Gold Fields Limited (NYSE: GFI) produces gold and holds gold reserves in South Africa, Ghana, Australia, and Peru. The company engages in underground and surface gold and surface copper mining and related activities, including exploration, extraction, processing, and smelting.
It holds interests in eight operating mines with an annual gold-equivalent production of approximately 2.2 million ounces, as well as mineral reserves of approximately 48 million ounces and mineral resources of approximately 101 million ounces. The company also holds attributable copper mineral reserves totaling 454 million pounds and mineral resources totaling 5,813 million pounds.
NovaGold Resources Inc. (NYSE: NG) explores and develops mineral properties in Canada and the United States. The company primarily explores for gold, silver, and copper deposits.
It holds a 50% interest in the Donlin Gold property that covers an area of 71,420 acres located in the Kuskokwim region of southwestern Alaska; and a 50% interest in the Galore Creek property, a copper-gold-silver project covering an area of 293,837 acres in northwestern British Columbia.
Natuzzi S.p.A. (NYSE: NTZ) designs, manufactures, and markets leather and fabric upholstered furniture worldwide. Its products primarily include stationary furniture, such as sofas, loveseats, and armchairs; sectional furniture; motion furniture; sofa beds; occasional chairs, including recliners and massage chairs; and furnishings and accessories for the living room and beds, bed linens, and bedroom furnishings.
The company sells its products primarily under the Natuzzi Italia, Natuzzi Re-vive, Natuzzi Editions, and Softaly brand names. It also sells its leather-upholstered products through franchised Divani&Divani by Natuzzi, and Natuzzi Italia furniture stores.
RADA Electronic Industries Ltd. (Nasdaq: RADA) is a defense electronics system house specializing in the design, development, production, and sales of advanced electronic systems for airborne and land applications.
It also provides ground-based radars for tactical applications, such as defense forces protection and border protection. The company has strategic relationships with Embraer S.A., Hindustan Aeronautics Ltd., Israel Aerospace Industries Ltd., Lockheed Martin Corporation, Rafael Advanced Defense Systems Ltd., Israel Military Industries Ltd., and DRS Technologies, as well as Boeing Defense, Space & Security.
UTStarcom Holdings Corp. (Nasdaq: UTSI) operates as a telecom infrastructure provider to develop technology for bandwidth from cloud-based services, mobile, streaming, and other applications.
It also provides carrier Wi-Fi products, such as a solution for a managed wireless access network, including multi-service gateways, network management systems, and Wi-Fi access points for carrier and MSO markets, as well as various deployment scenarios, including 3G/4G data offloading based on Wi-Fi technology; and a range of services comprising IPTV, high-speed Internet access, POTS, ISDN, VoIP, over twisted pair copper, and optical fiber.
These stocks were found by using fundamental indicators. Investors can also apply technical indicators as a screening tool, or they can combine technicals and fundamentals. That combined approach is used with indicators that have a proven track record of success in Stock Trading Tips PPK System. You can learn more about this trading service by clicking here.