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Long-term investing takes a clear approach to identify the best stocks and discipline to manage your folio over long periods of time and volatility. Please take a moment to review our approach as a guide. We expect that you will incorporate this thinking into your approach but we expect each person’s timeframe, risk appetite, and discipline will be slightly different.
How is our analysis different?
We want to take a clear, actionable, and practical approach to our investments.
- Getting to the point: While we find the fundamentals of the company important, our stock picks will not contain long diatribes on WHY we are excited about the stocks we are going to accumulate. We believe that our readers need access to the appropriate amount of information to take action on adding to their folio. This method has worked well for our investments to date.
- Ongoing technical analysis: We differentiate our position picks by providing clear and ongoing technical analysis of the stock from multiple time frames.
- Trading around our core: Our technical analysis will enable long-term investors to anticipate mid-term tops and bottoms and potentially trade around their core positions. While a long-term perspective is important to hit multi-baggers, we believe it is important to be aware of these tops and bottoms as a way to manage risk.
How do we select our long-term positions?
- Follows a macro trend: We believe there are a number of major trends that will influence the way we live, work, and interact. At the center of these trends is the shift to digital and the implications for corporations and Society. There are a number of trends that we are interested in, including, but not limited to: Cord Cutting, Remote Work, Gig work, Ecommerce, mobility-as-as-service, cybersecurity, data analytics, and digital ads. We will also pay special attention to the crypto market and the implications for decentralized finance/commerce.
- Relatively undiscovered: Where possible we want to find stocks that are still emerging and relatively undiscovered. That said, we may pick a subset of stocks that are well established as a way to stabilize our portfolio during volatile periods.
- Fundamental and technical analysis: We will apply a balanced view of fundamental analysis and technical analysis on our stocks. We are ideally looking for stocks that are 1) positioned to capitalize on the macro trends, 2) have a strong management team, 3) have a potential platform or could be a “picks and shovels” play, 4) can show rising earnings and 5) shows a trend in price (ideally rising prices).
- CANSLIM: In addition to the above fundamental criteria – We also will look for stocks that ideally follow CANSLIM criteria. More on CANSLIM can be found below.
How do we categorize our positions?
We categorize our picks into 3 different types of positions within our portfolio:
- Core Positions: These are the strongest stocks in our portfolio, and typically have a 5-8% allocation in our portfolio. These are stocks that have established moats, platforms and are leaders in their space. Within this list, we may have 1-3 “Conviction Core” Picks that may be more than 10% allocation of our folio. A “Conviction Core” pick is rare.
- Explore Positions: These are emerging leaders, that typically have a 2-4% allocation in our portfolio. These stocks are typical “sisters” to our core picks that are undervalued or are still under the radar. Explore picks tend to be a bit more volatile to hold, and we manage our risk by allocating a smaller amount at first. Explore picks may “graduate” to Core status once they prove their platform, or have a significant series of earnings events that give us confidence in their future growth
- Stocks on the radar: The beauty of the market is that it continues to produce new potential winners every day. At SMA Pro we will identify these stocks for our community. We may not add them to our folio unless an existing core/explore position pick drops off, or if a significant event triggers a buy for us. That said, this is a great way to surface ideas for the community to invest in based on their interest, timeframe, and risk appetite.
How do we manage the SMA investment folio?
Our portfolio will likely consist of up to 20 positions and some cash reserves to strategically buy dips.
About 70-80% of our portfolio that is not in cash will be made up of core positions. The rest will be in explore positions.
When a specific explore position “graduates” to a core position, we may rebalance from some of our core positions or our cash to increase our position size in the explore position.
We firmly believe in dollar-cost averaging or “averaging-in” to your position over long periods of time. The stocks we identify will present multiple opportunities over long periods to add on dips.
When a stock has a strategic dip, we will provide updates via our blog with specific technical analysis, dip scenarios, and buy points.
If you are investing – you need to make sure you either have cash available to buy the dip AND/OR have a DCA strategy!
Selling: At some point, we may eventually close our positions. We will sell if the following conditions are met:
- When a stock is fully valued or overvalued.
- When the long-term technical indicators for a stock signal a significant warning.
- When the company can no longer capitalize on a long-term trend – could be for multiple reasons, lack of execution, the share of wallet dilution from the competition, etc.
A word on CANSLIM
CANSLIM also referred to as “C-A-N-S-L-I-M” or “CAN SLIM,” identifies a process that investors can use to pick stocks poised to grow faster than average. Each letter in the acronym stands for a key factor to look for when purchasing shares in a company.
The seven criteria that comprise CANSLIM are as follows:
- C: Current quarterly earnings per share (EPS) has increased sharply from the same quarters’ earnings reported in the prior year. Generally, investors using CANSLIM want EPS growth of over 20%, but the higher the better.
- A: Annual earnings increases over the last five years. Again, annual EPS growth should ideally be in excess of 20% over the last three to five years.
- N: New products, management, or new events/information that push the company’s stock to new highs. This type of headline news can cause short-term excitement, propelling a surge of optimism within the market, and subsequent price appreciation.
- S: Scarce supply coupled with a strong appetite for a stock creates excess demand—and an environment in which share prices can soar. Companies acquiring (re-purchasing) their own stock reduces market supply and can indicate an expectation of increased demand, along with insider confidence in the firm.
- L: Laggard stocks are preferred within the same industry. Use the relative strength index (RSI) as a guide. The RSI is a momentum indicator that measures the magnitude of price changes to determine whether the price of a stock or asset is overbought or oversold. The RSI ranges from zero to 100. An RSI reading below 30 suggests that the stock is oversold and could be undervalued—creating a buying opportunity (bullish). Conversely, an RSI reading of above 70 signifies that a stock could be overbought or overvalued and could be a chance to sell (bearish).
- I: Pick stocks that have institutional sponsorship by a few institutions with recent above-average performance. For example, this could be a recently public company, still supported by a small handful of well-known private equity firms. Be cautious of stocks that are over-owned by institutions as you want to get in before the big money is fully invested.
- M – Determine market direction by reviewing market averages daily. A market average measures the overall price level of a given market, as defined by a specified group of stocks, such as the Dow Jones Industrial Average. CANSLIM stocks tend to be over-performers in bull markets.
Advantages and disadvantages of CANSLIM
All the elements of CANSLIM can be read as a wish list for fund managers seeking growth, so it is a matter of time until the buying demand increases. The catch is that stocks that fit the CANSLIM strategy can be among the fastest to drop if the market direction shifts and funds prioritize safe havens.
In short, CANSLIM is a good fit for experienced investors with higher risk tolerance. These stocks cannot be bought and simply held as much of the value is being priced in for future growth, meaning any slowing in the growth trajectory, or the market as a whole may result in the stock being punished.