This Factor Is Becoming More Important Separating Winners and Losers

By TradeSmith Research Team

We’ve all heard the phrase: “A rising tide lifts all boats.”

We hear it all the time.

We hear it connection with stocks – where a powerful bull market makes everything go up. Big caps, small caps. Blue chips, penny stocks.

We hear it in connect with the economy – where a prolonged run of growth leads to lots of new jobs, and rising wages all around.

But how many of us know the “backstory” of this maxim – how it came to be?

Because the story is pretty intriguing.

It’s attributed to U.S. President John F. Kennedy – JFK – whose father was a prominent investor nearly a century ago and who actually became the first head of the Securities and Exchange Commission.

JFK used it in more of an economic sense – that we all do better financially in a growing economy.

Well, our economy is holding its own in some stormy weather – but I wouldn’t call it a rising tide. All boats are not being lifted.

Stocks in general have done well since October, as I predicted they would. That tide lifted some boats, but not all. And that tidal level hasn’t risen at all in the last month.

In the present environment, you can’t be focusing on the tide.

You just need to worry about your own boat.

Lots of boats are still at anchor, some are being swirled about in seasickness-inducing eddies – and some are taking on water, after hidden rocks punched holes in their hulls.

In such uneven waters, it’s all about being in that one right boat. Do that and you’ll navigate the tidal threats just fine.

It’s something I refer to as “a stockpicker’s market.” Which is great if you pick the right stocks.

And that’s what my system and Quantum Score are designed to do for you …

Selectivity Is Key

To be clear, I’m not saying we completely ignore the tide, even if we want to. Right now, the tide is all about inflation and interest rates.

The waters got a little murkier this week as hotter-than-expected inflation data prompted Federal Reserve Chairman Jerome Powell to say the central bank is likely to continue raising rates, perhaps higher than previously thought.

Stocks slid on Tuesday after Powell’s statements, and the headlines once again screamed again about a possible recession and market weakness. Tomorrow morning’s monthly jobs report will be even more important than usual.

As you may know, I’ve been bullish on 2023 going back to last fall. The nice rally from October to early February played out just as I anticipated. The S&P 500 is flat since then.

The data still tells us inflation is trending in the right direction, and I believe we are closer to the end of interest rate hikes than the beginning. That said, I now expect more volatility that will result in a more moderate uptrend.

That’s not as bad as it might sound. In fact, it’s why I’m glad we are in a stockpicker’s market.

Individual companies will continue to outperform even if the markets chop along. That’s why my strategy remains the same – to use our Quantum Edge system to find the best of those outperformers.

These are the stocks with outstanding fundamentals and strong technicals that also have Big Money flowing into them.

Beware the Growing Debt Albatross

One fundamental factor I incorporate into our Quantum Edge algorithms may not be overly exciting, but it sure is important – debt.

I’m not against debt. I have debt, and you probably do, too. It’s a useful tool for consumers and businesses. It lets us buy houses or pay for college. And it lets companies finance expansion, buy back stock, restock inventory, or pull off merger deals.

But too much of anything can be a bad thing – and that goes double for debt. Especially in a time when interest rates are rising. Higher interest rates mean a higher cost of debt, and that’s where things can get slippery.

When analyzing stocks, especially right now, I recommend you pay attention to the debt-to-equity ratio. It’s a good way to gauge a company’s leverage.

If a company owes more than it’s worth, that’s a sign of overleverage. And it’s a big red flag.

Just like we consumers have to make payments on our homes, cars, or credit cards, companies have to pay what they owe, too. This is known as “debt service” in the business world. Firms can handle larger debt during times of prosperity. But if sales drop, profits shrink or interest-rates spike, debt-laden companies will get squeezed – and so can their share prices.

I invest in companies with little to no debt. And by “little,” I mean a ratio of 25% debt-to-equity or less. That means that a company has borrowed just one-fourth or less of what it’s worth, which is in the safe zone.

Just for grins, I sliced our Quantum Edge dataset to look at companies worth $50 billion or more with a debt-to-equity ratio of 200-to-1 or higher – meaning they’ve borrowed double what they are worth, or more.

The decision whether to own such companies involves more than just debt-to-equity, but I was surprised at some of the stocks on the list. Here are five of the more recognizable names, along with their debt ratio and Quantum Score:

The decision whether to own such companies involves more than just debt-to-equity, but I was surprised at some of the stocks on the list. Here are five of the more recognizable names, along with their debt ratio and Quantum Score:

  • Apple (AAPL)
    • Debt-to-equity ratio: 261.4% (high)
    • Quantum Score: 60.3 (okay but not great)
  • Caterpillar (CAT)
    • Debt-to-equity ratio: 236.8%
    • Quantum Score: 60.3 (okay but not great)
  • Home Depot (HD)
    • Debt-to-equity ratio: 3,224.3% (very high)
    • Quantum Score: 51.7 (average)
  • IBM (IBM)
    • Debt-to-equity ratio: 246.1% (high)
    • Quantum Score: 37.9 (poor)
  • PepsiCo (PEP)
    • Debt-to-equity ratio: 241.9% (high)
    • Quantum Score: 51.7 (average)

Apple and Home Depot both have the highest Fundamental Score at 66.7%, which is solid. I may not run out and but their stocks today, but they don’t concern me as much as the other three.

Ride This Tide

One way to find rising tides and rising boats is to analyze sectors. And here, the data is clear.

The strongest sectors are Discretionary and Technology, and flows right down to individual stocks. The highest-ranking stock in my entire system is a technology company – one that we also own in Quantum Edge Pro that has soared 25% already in 2023.

The second-highest ranked stock in my system is also a tech company, and there’s a four-way tie for third place split evenly with two tech stocks and two discretionary stocks.

I can’t give all that information away here, but we have talked about one of the discretionary stocks before. Crocs (CROX) posts a stellar 86.2 Quantum Score, has generated 12 Big Money buy signals in the last six months, and shares have surged 150% since last summer.

We will continue to monitor the economic data and the Federal Reserve’s decisions, but I recommend you give even stronger consideration to corporate debt when researching possible investments.

Most of all, I recommend you put your money into boats that will continue to float higher than the rest no matter how much the tide rises or stagnates. These are the great business whose stocks have strong technicals and – if you’ll pardon the pun – boatloads of big buying.

Talk soon,

Jason Bodner
Editor, Jason Bodner’s Power Trends