The Secret to a Stock's Full Potential...

Editor's note: This Weekend Edition, we're taking a break from our usual fare to look at what matters in times of financial panic – and beyond. In this essay, Rob Spivey of our corporate affiliate Altimetry explains the importance of checking a sector's "pulse" when scouting for your investing opportunities... and how one tool is designed to do just that, in any kind of market.  

In early 2020, the world was in panic...

The coronavirus was spreading rapidly, wreaking havoc around the globe. Entire countries were on lockdown, and economies were at a standstill.

Even still, we knew it wasn't investing Armageddon... and that there would be abundant opportunity.

The pandemic was a catalyst for a dramatic shift in how businesses and consumers operated. Folks around the globe were working, learning, and even buying groceries from the comfort of their own homes.

It's what we call the "at-home revolution." And it changed life as we know it...

Employees and businesses needed the equipment and software necessary to be productive from home and stay connected with colleagues. And students were learning and attending classes exclusively online, too.

With families stuck at home more than ever before, they needed ways to entertain themselves. They were streaming more content and playing more video games.

In short, houses needed to be smarter. They had to be equipped with everything to live and work at home with ease.

This trend was bound to yield some clear winners... You just had to know where to look. And that meant more than picking stocks at random.

Before you zeroed in on individual companies, you had to get the sector right.

Let me explain...

We regularly analyze sector signals to identify which areas of the market could be big winners each year.

We've been doing this institutionally for more than a decade. The main goal – aside from all the underlying analysis we do every day – is to pinpoint the stocks set to outperform the market.

At the onset of the COVID-19 pandemic, one sector in particular stood out to us... technology.

It made sense. The at-home revolution was pushing folks to invest in entertainment and remote-work capabilities. Technology could help people work, learn, and play at home.

And it wasn't just Big Tech companies that stood to benefit. Semiconductors – the companies that make the tiny chips that power our devices – were also poised to profit. These companies supply Big Tech. So when the biggest players do well, so do the chipmakers.

We recommended a number of tech stocks to subscribers, including chipmaker Lam Research (LRCX) and online-payments platform PayPal (PYPL) in our Altimetry's Hidden Alpha monthly service. We closed both a little less than a year and a half later, each for a 112% gain.

In order to earn these outsized returns, we leveraged a powerful tool...

We first introduced our subscribers to the ETF Analyzer last week. It's a sector analysis system that cuts out as-reported distortions to issue grades for exchange-traded funds ("ETFs") and mutual funds.

We've been using some form of sector analysis for years. Now, we're finally able to offer it to everyday investors.

The ETF Analyzer puts together all of our Uniform Accounting data to determine the best sectors to be in right now. Here's how we used this data back in 2020...

At the time, our sector analysis showed us that technology – as measured by the Technology Select Sector SPDR Fund (XLK) – was going strong.

It tracks a basket of S&P 500 Index tech stocks. And it was one of only two sectors that got an "A" grade for overall sector performance. Take a look...

Based on this data, we could see that the tech sector was set up for success. That was half the battle...

Then, we just had to find tech stocks that were benefiting from the at-home revolution.

Today's economy doesn't look like it did in 2020... nor do the different corners of the market. But that doesn't mean you can ignore what these sectors are doing today.

In fact, my colleague and Altimetry founder Joel Litman recently said that 50% of a stock's movement can be explained by the sector that's powering it.

That means it doesn't matter how much you like a stock or how strong the fundamentals are... If the sector is working against it, then it probably won't reach its full potential.


Rob Spivey

Editor's note: This year has been brutal... And investors are nervous heading into 2023. That's why Joel and his team believe it's more important than ever to examine the underlying sector of a stock before putting your money to work in it.

In fact, Joel recently went on camera to discuss the two sectors that are poised to soar in the new year. You see, what he expects for the markets is an event we haven't seen in 15 years... So now is the time to prepare. Click here for all the details.