My Three Trading Tips for Handling the Overbought Market
How can we find reasonably priced stocks right now? By staying off the beaten path. Let me explain.
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The markets were bifurcated last week as the tech-heavy Nasdaq rose just over 3.5%, while the Dow and small cap Russell both ended in the red for the week. While it is hard to find many reasonably price stocks in the Nasdaq currently, the index could well continue to outpace the market as it has all year, thanks in part to year end window dressing.
It's typical these days to find growth stocks with Price/Earnings-to-Growth ratios north of two or even above three these days. Somewhere, my old Finance 403 professor (a value investor if there ever was one) is rolling over in his grave. Apple AAPL has a bigger market cap than the annual gross domestic product of the United Kingdom as do a few other mega caps. The Cupertino tech giant also trades at roughly nine-times revenues, compared to its average of five-times sales over the past decade or so. Are Apple’s growth prospects 80% better now than they have been over the most recent 10 to 15 years? Given the valuations of the leaders of the market rally for the past two years or so, it is little wonder Warren Buffett is sitting on a record amount of cash right now.
As my covered-call holdings expire in the money, I have been forced to deploy these funds back into the market. Being a contrarian, I am not chasing the market leaders. The equities I am buying fall into three basic categories:
The first is out-of-favor value stocks; the energy sector currently has plenty of these. Take Valero Energy VLO, which I have built a recent position in. The largest refiner in North America is seeing a dramatic fall in profits this year thanks to declining crack spreads. But the stock trades at just over five-times the profits the company made in fiscal 2023 and sports a better than three percent yield. The shares do seem to be trying to build technical support near current trading levels. The company's assets are valuable, given there hasn’t been a major refinery built in the United States since the late 1970s.
Second, I continue to invest in the few growth-at-a-reasonable price stocks that I am finding in the current market.
And, third, biotech/biopharma stocks. Right now the largest chunk of my funds going into the market is targeting biotech/biopharma stocks that have products on the market and are on the cusp of profitability with good balance sheets. This is where I am finding the most opportunities for my covered-call targets. I try to concentrate on names that have both liquid and lucrative options against their equities.
I have talked extensively about these sorts of names in my columns in 2024 and they continue to be covered call trades for my portfolio that I keep trading. One of these is a small biopharma called Aurinia Pharmaceuticals AUPH, which has moved up some 20% since I last highlighted this name a month ago. After losing just over 50 cents a share in fiscal 2023, Aurinia should eke out a small profit in fiscal 2024 on over 30% revenue growth. Earnings are expected to surge to more than 50 cents a share in fiscal 2025, and the company has been the subject of buyout chatter a few times over the past year. Dynavax Technologies DVAX and Amicus Therapeutics FOLD, both of which I have mention frequently in 2024, are following similar paths to profitability.
Trading these sorts of opportunities instead of chasing the market leaders have worked well for my portfolio in 2024 and will remain my game plan as 2025 rapidly approaches.
At the time of publication, Jensen was long AUPH, DVAX, FOLD and VLO.
