In bear markets, the best stocks bottom well before the major indices do. In today’s rough market, it’s worth your while to find these gems, because they’re likely to become the next batch of great American stocks.
Consider what happened with Amazon (AMZN) after the dot-com bubble. After peaking in December 1999, AMZN’s stock stopped falling in September 2001. The S&P 500 didn’t bottom until October 2002, or 13 months later.By the time the market bottomed, AMZN had surged more than 189% off its lows.
The same thing happened after the global financial crisis. This time, AMZN stopped falling in November 2008. The S&P 500 wouldn’t bottom out until March 2009… four months later. By then, AMZN had already rallied more than 70%.
This was a great “tell” that Amazon was going to be special— because great stocks like Amazon bottom out early.
Amazon went on to soar as much as 10,800% over the next 13 years.
We see this time and time again with leading stocks. Leading semiconductor stock Advanced Micro Devices ( Chart AMD - $98.01 0.13 (0.133%) ), like AMZN, bottomed out in November 2008. By the time the market stopped falling in March, AMD had already rallied 30% off its lows.
And that was just the beginning. Over the next three months, AMD soared 131%, more than double what the S&P 500 returned over the same stretch.
Why do the best stocks bottom out before the indices? Simply put, big institutions invest ahead of the public. They tend to accumulate big stakes in the best stocks earlier than the public is willing to do.
It’s critical to pay attention to what individual stocks are doing during bear markets. Often, they reveal themselves as new market leaders before most folks are ready to buy stocks again.
To identify market leaders, first identify the strongest industries. According to legendary trader William O’Neal, 37% of a stock’s price movement comes from the industry group it’s in. So, if you’re going to trade stocks, focus on the strongest areas of the market.
Today, there aren’t many industries standing out. But a few are, and that’s where I think the best stocks for the next few years will emerge. One of the strongest groups today is healthcare information services companies.These companies help hospitals and other healthcare providers manage their clinical data to improve patient treatment.
Now, I realize this isn’t a sexy industry like cloud computing or electric vehicles. But health information services is easily one of today’s hottest industries,and hardly anyone is paying attention to it.
On July 21, Amazon purchased 1Life Healthcare ( Chart ONEM - $0. 0.46 (2.873%) ). This caused ONEM’s share price to surge 67% in a day. Convey Health Solutions ( Chart CNVY - $0. 0. (0%) ) is in talks to be acquired by TPG Capital, news that caused Convey’s share price to spike 138% in a day!
Of course, it’s not enough for a handful of stocks in an industry to be doing well. I want to see many stocks in an industry displaying strength. As you can see below, the SPDR S&P Health Care Services ETF (XHS), a good gauge for the overall sector, has rallied strongly in recent months. At the time of writing, XHS is attempting to reclaim its 200-day moving average.
This kind of standout strength hints at a big opportunity ahead. After all, the S&P 500 is currently about 9% below its 200-day moving average. And the tech heavy Nasdaq index is trading 14% below its 200-day moving average.
XHS is also displaying incredible relative strength versus the S&P 500—take a look for yourself. This chart compares the performance of XHS with the SPDR S&P 500 ETF Trust (SPY). When this line is rising, it means health info services stocks are outperforming the market. You can see the industry bottomed relative to the market back in February:
Here are two healthcare stocks that look like big winners in the making:
The first is Signify Health (SGFY), a healthcare technology company. Last quarter, Signify’s sales grew 20%. Its earnings per share for this year are also projected to grow 276%, and 145% in 2023. Investors have taken notice. SGFY is above its 200-day moving average. It’s in an uptrend, unlike most stocks these days:
Next is Evolent Health (EVH), a healthcare company which provides clinical solutions to various providers. Like Signify, Evolent Health has rock-solid fundamentals. Last quarter, its sales grew 38%. And its earnings per share are projected to grow 91%, and 87% in 2023. Its stock bottomed out in January and has been in an uptrend since. In fact, it’s been trading above its 200-day moving average since March.
Both SGFY and EVH are good bets to continue leading the market. Just understand the macro environment is still highly volatile. So, be sure to use proper risk management, like small position sizing.
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