When Willie Sutton, the iconic Depression era folk-hero, was asked by a reporter why he robbed banks, he famously replied, “because that’s where the money is”.
For advisors who allocate client assets to stocks as well as ETFs, finding those stocks that add alpha to a portfolio is the holy grail. Using a simple, top down, approach that leverages the PortfolioWise ETF ratings for SPDR Sectors and Subsectors (Industry Groups) are the first two steps in a three step process that identifies the stocks most likely to add alpha to a client’s portfolio.
Once the most promising Sectors and Industry Groups are culled out, the PortfolioWise stock research reports, which incorporate Power Gauge ratings for individual stocks, add the final level of due diligence for advisors seeking alpha.
Here’s a recent example of this top down process in action.
The Sector Grid in PortfolioWise shows the 11 Select SPDR Sector ETFs arrayed by their Power Ratings. Let’s look at the current picture and then go back a month to see which sectors had bullish ratings.
The display on the left shows that the Technology, Health Care and Communications ETFs, XLK, XLV & XLC, currently have bullish Power Ratings. Looking back one month we see that only Health Care (XLV) had a bullish rating. As an aside note that the Energy ETF, XLE, has had a consistently bearish Power Rating.
Since the Health Care sector is made up of various industry groups, our 2nd step in this 3 step process for finding alpha generating stocks, is to look at the SPDR Subsector ETF Power ratings to see which ones have bullish ratings.
The above display shows that the Biotech ETF, XBI has the strongest Power rating and has 46 bullish rated stocks vs. only 8 bearish ones. This was also the case one month ago, as the Power ratings tend to be persistent.
Looking at a chart of the XBI shows the strong absolute and relative performance of this biotech ETF over the past year, as well as all the pertinent information about the ETF.
By drilling down into the holdings in the XBI we can quickly zero in on the stocks with bullish Power Gauge ratings, and generate a full research report for compliance purposes.
Here are 2 large cap biotech stocks, Regeneron Pharmaceutical and Vertex Pharmaceutical, within the XBI, which have had bullish Power Gauge ratings (green line under the price chart) for the past 3 months. Both of these stocks have more than doubled the performance of the XBI over that period.
If you want to add alpha to a client’s portfolio use this simple 3-step process to “go where the money is” and find bullish rated stocks in sectors and industry groups with bullish PortfolioWise ETF ratings.