These 'Sacred Truths' Reveal Winning Stocks, Longtime Investing Pro Says

In the interview, he talks about why buybacks “are a huge deal” and that rainy Fridays in New York City mean higher market liquidity than sunny Fridays.

Here are highlights of our conversation, focusing on Navellier’s sacred truths of investing:

THINKADVISOR: Let’s start with this “sacred truth”: “Never set your strategies based on what the economists are saying.” How does your approach differ?

LOUIS NAVELLIER: Our research is two-fold in order to hold alpha stocks that zig when the market zags. We’re purposely trying to buy high alpha, low beta, stocks that do well in adverse market environments. That’s part of our quant [analysis].

On top of that, we score stocks.

We combine those two models, and it gives you staying power.

Next truth: “To earn superior returns, investors must blend together and use fundamental analysis and technical analysis.”

That’s my quant [strategy]. We sell good stocks that will go higher and replace them with better stocks.

We’re also trying to find stocks that complement each other. We have optimization models behind the scenes.

Every stock is a squiggly line. We take a bunch of those squiggly lines and figure out how to blend them to get a smooth line.

You do that by skewing a portfolio about 60% conservative standard deviation stocks, about 30% moderate standard deviation and 10% high standard deviation, which are the most aggressive stocks. 

Another truth: “Big is better — not all the time, of course.”

Big is better when you’re going to invest in a monopoly. We’re obsessed with finding monopolies.

We prefer monopolistic companies dominating a [particular type of] business because the higher the operating earnings, the more the company can dominate if competition arises.

When we find a monopoly, we love it and will ride it as long as it lasts. But usually competition will emerge.

What are some monopolies you’ve invested in?

The first was Conair [hair grooming products] in the 1980s. Eventually competition arrived. The second was Tyson Foods. Eventually everybody figured out how to chop up chicken and compete. But for a while, they had quite a run.

The next monopoly we had was Hansen Natural, which changed its name to Monster Beverage because of its big seller, Monster energy drink. That was a huge win for us.

What else?

I invested in Nvidia [early on] but got out of it for a while. I got in for the second time more than five years ago.

You write: “Fundamental analysis should be the foundation of any stock selection process.” You also say, “Fundamentally superior companies are not necessarily the ones that will perform best.” Please discuss the latter.

It helps to have good fundamentals. But Wall Street is very fickle, very fashionable. For example, retail is incredibly fickle.

You can fight these micro-trends. Part of the [push] in America is to make businesses more efficient.

Costco’s and Walmart’s direct sales models and online sales models are great. Walmart finally got more wealthy customers into their stores.

A lot of people go to Walmart for groceries now. Walmart is like five stores in one.

“Buybacks are a big deal,” you write.

They’re a huge deal. When we have robust buybacks, it’s a sign of market health.

We love high cash-flow companies, monopolistic companies. When we look at P/E ratios, we [project] out 12 months.

Then there’s the sacred truth: “Two of the most powerful forces in the markets are supply and demand.”

Liquidity isn’t there every day. There’s better liquidity on Monday and Tuesday; it starts to ebb on Wednesday. It’s hard for the markets to go up Thursday and Friday because [traders] are preparing to get away for the weekend.

If it’s rainy and miserable in New York on a Friday, we’ll have better liquidity than if it’s sunny because the [traders] are going away for a long weekend.

Markets have a natural rhythm to them. You have to get used to it.

Another sacred truth: “The markets have seasons, and those seasons repeat themselves year in and year out.”

The strong dollar is pushing up domestic stocks. So domestic stocks are doing better than multinationals because the dollar creates headwinds.

[The market] usually starts to burp in February, and that has been going on.

In March, analysts are usually trying to revise their estimates higher before their earnings come out in April. They put on “window dressing” to enhance the returns that will be reported for the first quarter of the year.

Professional managers have to make their portfolios pretty before they see their clients.

And this sacred truth: “The U.S. economy is an engine of growth.”

America is leading the world right now in demographics. While most of the world is shrinking, we’re growing. Things are cheaper here.

We have an incredible advantage. We’re the growth engine of the world.

Also: “The U.S. debt problem will ultimately become your problem as an investor. But there are steps to mitigate that threat.”

We have an incredibly strong dollar. While there are tariffs and shutting down a bunch of the government, we can do a lot of collateral things; like, with real estate, we can start developing land.

We have a lot of resources; so we can afford a bigger deficit.

The other way we fight it is to keep getting more people to pay into the system.

You write: “At some point, the greed of others will be visited upon you.”

Short sellers will occasionally attack us, and they all operate the same way. They come out during holiday weekends when no one is paying attention, or on a Friday.

They try to prick the bubbles of hot stocks that we [and others] own.

An example of a short seller trying to capitalize on our successful stock is that Muddy Waters Research went after Eli Lilly not long ago.

There are unscrupulous people out there.