Stock Picks For NovemberWhile the bulk of my portfolio and separately managed accounts business predominantly involve investments in volatility products (explained here), my observation as a service provider is that investors, whether consciously or unconsciously, often lean toward stocks. This burgeoning interest led me to step into this realm since November 2022. My chosen approach aligns with value investing principles, drawing inspiration from the philosophies of renowned investors like Howard Marks and Benjamin Graham. My primary nemesis in this pursuit is subjectivity. Hence, I've developed a sophisticated algorithm that evaluates over 2,400 publicly traded American companies through a discounted cash flow analysis. This model leans heavily on sensitivity analyses concerning major assumptions (such as discount rate, beta, and earnings extrapolation). Its purpose is to ensure that, at the very least, a company's value substantially exceeds its current market price. I typically reassess my recommended stock portfolio on a monthly basis, allocating around 2.5% to 5% per company. Once a company's stock price meets its estimated fair value, I close the position. Figure 1 illustrates the probability density function showcasing the relative value of the US companies I've scrutinized. It's evident that most of these companies appear to be undervalued by 5% to 10%. Figure 1: Probability density functions displaying valuation of US companies. At the time of writing, year-to-date (YtD) returns for the S&P 500 stand at approximately 19%. Interestingly, this seems somewhat contradictory when compared to Figure 1. A deeper analysis reveals that the 2023 market equity performance has been primarily driven by the top 10% of stocks. In contrast, the remaining 90% of stocks are nearly flat; refer to Figure 2. Figure 2: Performance comparison between the top 10% and bottom 90% of companies in the S&P 500. The analysis assumes equal weighting. This article shares the stock picks for the month of November. Following the valuation of companies, the screening process involves assuming:
Table 1: November's Stock Picks. General Motors GM, Albermarle ALB, Delta Air Lines DAL and United Airlines UAL have an average upside potential of 40%. A pertinent question one might ask is: does this method yield results? Is it successful? To monitor the performance of my recommendations accurately, I've established a live portfolio on a well-known copy-trading website. This setup ensures transparency regarding my methodology and the potential claims I might make about the performance of my picks. Figure 3 displays the results. I usually prefer using the Dow Jones as a benchmark because the stocks in this index better mirror my approach in selecting equities for the portfolio. Figure 3: Performance comparison of the stock picking strategy outlined in this article against the Dow Jones benchmark.
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