The Best Time to Buy “Trinity Stocks”

By TradeSmith Research Team

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Here at TradeSmith, we’re incredibly excited about a small category of investments we call “Trinity stocks.”

Trinity stocks hold unusually strong moneymaking power. Our research shows that – thanks to a confluence of three high-powered factors that most stocks have just one or two of – these stocks are your absolute best chance of outperforming the market.

These are stocks that have:
  1. A high Business Quality Score (BQS), our proprietary composite of key fundamental factors that every business needs to get right to be successful.
  2. A cheap valuation, which shows you’re paying a good price for what you’re getting.
  3. An uptrend. Stocks that go up, especially over the long term, tend to keep going up for years and years.
These three qualities are rarer than you might think.

A stock can have a high BQS and be in an uptrend, but also be pretty expensive. Chipotle Mexican Grill (CMG) is just one example.

It holds a coveted BQS of 99.8, and is in a very-long-term uptrend, but is also priced at 54 times earnings… or nearly three times the S&P 500. No matter which way you slice it, stocks this expensive are vulnerable in bad economic times.

Other stocks can be cheap and good quality but trending sideways. Pool Corp. (POOL) is like this. It’s priced at 25 times earnings and holds a similar BQS to CMG, but its stock has gone nowhere in the last year and a half.

I could go on. The point is, if you want to buy quality growth names that are firing on all cylinders and have great charts backing them up, Trinity stocks are where you want to be.

And if you really want to juice the gains in Trinity stocks, you should consider another important factor outside of the core three: when to buy them.

Lucas Downey beat me to it yesterday. He pointed out one sector of the market that’s extremely oversold, pays out the highest yields in the S&P 500, and whose businesses are rock-solid and essential to the world.

Today, I’d like to uncover a few of these stocks that meet our “Trinity” definition, while also being on sale…

Three Trinity Plays in an Unloved, Oversold Sector

The oil & gas sector (XOP) is currently the most oversold group of stocks in the market.

With a 35 on its Relative Strength Index (RSI – the bottom portion of the chart below), it sits alongside other energy ETFs as the most unloved stocks out there – despite the rapid recovery of the last month.

It’s no surprise. Oil prices have been sliding since late September, cutting into oil & gas company profits.

But this oversold reading is about as bad as it’s been over the past several years – barring that one wild moment when oil prices went negative in 2020:

I’m on record saying I think oil prices will go higher in the coming years. Years of underinvestment and recent strains on supply, paired with a hastening toward high-cost and low-impact renewables as global energy demands soar, make me still confident in this idea.

With all this in mind, oil & gas stocks are looking like a smart buy here at near-extreme oversold levels.

And several quality names are popping up on our Trinity screener:
  • Murphy USA (MUSA) | 98.1 BQS | 14.98 P/E | $7.5 Billion Market Cap |$1.64 Annual Dividend

    Anyone who’s filled up the tank after a shopping trip at Walmart knows about Murphy USA. This gas station chain spun off from Murphy Oil in 2013 and has recently begun expanding outside of Walmart supercenters to operate its own independent gas stations.

    MUSA is sensitive to changes in gas prices. That could be part of the reason why it’s down more than 7% from its peak in early November.

    But over the long term, the stock is a monster. It’s up 805% since it went public (blue line), outpacing both the S&P 500 (orange) and far above the beaten-down XOP (light blue).

    The stock has a BQS of 98, among the highest possible scores. It trades as just 15 times earnings – somewhat pricier than the 10-year average P/E for oil & gas stocks of 11.78. But in exchange for that price, you’re getting a high-growth, well-run gas company that pays an annual dividend of $1.64.

    MUSA is definitely worth a look with prices down in the past month.
  • Valvoline (VVV) | 96.7 BQS | 28.88 P/E | $4.6 Billion Market Cap | No Dividend

    A smaller and quite pricier company, Valvoline makes automotive oil products, and it services vehicles at more than 1,650 locations in the U.S.

    Its business dates all the way back to the 1860s, but only went public on the NYSE in 2016. That year being the start of the strongest period of the bull market, it hasn’t outperformed the S&P (orange). But it has beaten the broader oil & gas sector (light blue) handily.

    More than anything, VVV represents a solid growth story. Revenue is expected to grow 45% in the next two years. At the same time, its forward next-12-months (NTM) P/E ratio is at 23.23. That means it’s expected to grow into its currently pricy valuation over time. And even now, its BQS is at 96.7 – a strong mark of quality.

    The stock doesn’t pay a dividend, but at such a small market cap and high growth rates, VVV is a strong speculation on a future where the majority of drivers will still need to change their oil every few months.
  • Imperial Oil (IMO) | 97.6 BQS | 8.3 P/E | $31.4 Billion Market Cap | $1.48 Annual Dividend

    Imperial Oil is a Canadian petroleum company, the country’s second largest, and majority owned by U.S.-based ExxonMobil. It’s one of the world’s largest producers of crude oil and natural gas.

    Buying IMO is like buying an oil major in the U.S., but with unique exposure to the Alberta Oil Sands patch – a zone of high-concentration petroleum resources in northern Alberta, Canada.

    It’s also a high-quality company at a dirt-cheap valuation, with shares priced at an 8.3 P/E ratio despite outperforming the broader S&P 500 and the oil & gas sector over nearly five years and returning more than 100%:

    IMO investors also earn a $1.48 annual dividend, making the company especially attractive as an oil major with a smaller market cap, but still cheap and with the potential for growth. And its BQS of 97.6 shows us that the business is fundamentally healthy right now, giving it a long runway for that growth.

Trinity stocks are so powerful precisely because they focus on the three factors that matter most for any long-term growth investor.

You always want to buy undervalued businesses that have strong potential to grow. You always want to buy stocks in a strong uptrend. And you always want those businesses to be of sublime quality.

Trinity stocks offer all three of these factors at once, making them smart buys in virtually any environment.

But buying the Trinity stocks from an oversold sector, like oil & gas is today, may be even better.

We’ll be on the lookout for more Trinity stocks here in TradeSmith Daily, especially when you can get them at fire-sale prices.

To your health and wealth,

Michael Salvatore
Michael Salvatore
Editor, TradeSmith Daily