Editor's note: This Weekend Edition, we're sharing an essay by Chaikin Analytics founder Marc Chaikin. Most recently run in DailyWealth on June 3, 2021, this piece highlights the key components of Marc's proprietary investment model, the Power Gauge. He explains why this system works in any market environment... and how it can guide any investor to wealth-building opportunities.
Today, I'm sharing exactly how my investment model – the Power Gauge – works.
I'll give you the full details. And considering that this is a quantitative model, that might seem crazy...
The Power Gauge looks at 20 factors to determine which stocks are buys and which are sells. Who would spend years developing a system like that and then give away how it functions?
I understand that thinking. But it misses the point...
You see, while building the Power Gauge, I learned that the 20 different factors matter... but their weightings in the process are much more important. That's the proprietary information that lets me share the Power Gauge "ingredients" safely with anyone who asks.
It's also why the key to investment success is much bigger than any one measure or signal. Let me give you an example so you can see what I mean...
Say I make you dinner and give you a list of all the ingredients I used. The made-from-scratch pasta had flour, eggs, and salt. The sauce included tomatoes, garlic, onions, and oregano.
That's all I tell you, though... I don't give any further instructions on how to make it.
Do you think you could recreate the meal exactly as I did? I'm not talking about making something close to what I made... I'm talking about a perfect replication.
If you're a trained chef, maybe you could do that. But we all know there's a lot more to creating a final product than simply knowing the list of ingredients that go into it.
This is why I say investors need to have a plan. It's not enough to just know what you're looking for... You also need to know how important each ingredient is. And you need to look at it as part of the whole. That's also what makes my Power Gauge model work as well as it does.
So, what are the ingredients of this model?
We break the 20 factors in the Power Gauge into four main groups...
- Financials
- Earnings
- Technicals
- Experts
These four groups allow us to look at a company through multiple lenses. We see where it's strong and where it's weak... and most important, where it's likely headed.
Here are the five factors that make up the Financials category...
We don't have time to dig deeply into all these factors. But you can see that we're looking at valuations, debt load, return on equity, and cash flow to get a feel for a company's financial strength.
Longtime readers know how useful these measures are – especially free cash flow. My friends at Stansberry Research call it "the number that doesn't lie." It only looks at cash that comes in versus cash that goes out – and that's one of the few items that accountants can't mess with.
If a company has a lot of free cash flow, it's likely in a strong financial position.
Next, we take a look at the company's earnings...
We want to see consistent – and ideally, growing – profits from a company. Strong earnings performance is crucial for a stock to succeed. We also want to invest in companies that are beating Wall Street's expectations (which is called an "earnings surprise").
Financials and earnings give insight into how a company is really performing over time.
The next factors give us the technical picture for a stock. After all, we only want to buy when prices are moving in our favor. Take a look...
Not only do we need to see a strong uptrend, but we also like to see outperformance versus the overall market.
The trend should also be escalating on strong volume – that is, we want to see more activity in the stock than in the past. This shows us prices are moving higher in a healthy way.
If all that's happening, the technical picture shows that we could have a great buying opportunity.
The last set of factors is the experts. This is a piece of the puzzle most investors overlook. It looks at what the folks who know a company best think about it today...
Here we look at insider activity. We love to see company executives buying shares... because they only do it when they expect higher share prices.
We also watch analysts closely for changes in their ratings and earnings estimates. When these folks get more bullish, more upside is often ahead. Finally, we don't want to see a lot of investors shorting the stock. That can be a warning sign of trouble.
This is a brief look at the Power Gauge. It would take a lot more time to cover all of the factors in detail. But the complete list is in these images.
Again, it might seem crazy that I'd share this information... But it's just an ingredient list. Turning it into the final meal isn't so simple.
I personally use the Power Gauge as my investment process. It guides my decisions. And I want to share it with as many investors as I can.
I understand if it's not for you. But if that's the case, you need to make sure you've got an investment strategy of your own. It's the only way to survive the tough times the market throws our way.
Good investing,
Marc Chaikin
Editor's note: Millions of Americans got pummeled by the market's latest drop. But on March 30, Marc is going on-camera to warn you of an even bigger threat that's up next... and how his Power Gauge investment model can help you beat it. He's even revealing the No. 1 stocks to buy and to avoid right now. This is a financial story no one else is telling... Click here to learn more.
