35-year growth investing vet Louis Navellier uses a multi-layered process to buy companies that zig when the market zags. Here's how it works, and why he says good stock picking is better than buying ETFs.
By: Business Insider
August 25, 2021 at 05:00 AM EDT
Navellier & AssociatesSummary List Placement
Louis Navellier says that in old television appearances he was sometimes described as a momentum investor — someone who buys stocks that are already on the way up, then gets out at the peak with a big profit.
He says it's never been true.
"There's no earnings momentum in my system. There's none," Navellier told Insider in an exclusive interview. "My whole thing is high alpha, low standard deviation" for volatility.
Navellier has been picking stocks and writing about the market for decades. He's made his name as a successful growth investor, and according to data from Navellier & Associates, $100,000 invested according to his regularly-updated Growth Investor Buy List in December 1997 would have turned into $1.77 million as of July 21. An investor who instead put $100,000 into the S&P 500 would have $734,000 today — less than half as much.
Navellier says he evaluates stocks based on fundamental attributes like earnings stability, sales growth, and analyst revisions. He also compares large companies against other large companies and small companies against each other. He notes that investors in different parts of the market seem to prize different attributes in stocks, with momentum more important to small-cap investors and stability and profit margins more important in large caps.
He calls that the best way to determine which stocks really stand out.
"We only buy stocks that zig when the market zags," he said. "We're trying to find stocks that, again, are moving independent of the market, and then we'll do a deep dive to figure out what's the fundamental force that caused them to go up."
That is, a stock that doubles the gains of the rest of the market is of no interest if it's only moving in the same direction as other stocks — because it isn't diversifying the portfolio, and it's hard to tell if that stock's gains will endure when the market runs out of gas.
Navellier says his firm goes into earnings periods "locked and loaded" to benefit from stocks that beat expectations, and they sell stocks that get too volatile afterward because that volatility is the chief thing he wants to avoid. While only 10% of his investments are high-risk, he wants to use methods that stand out.
"When we build our fundamental models, it's kind of like building a ski run," he said. "If the top 40% of the model beats the market, then we call that a green run. That's not that impressive. But if we can get maybe the top 15% of the market, that's like a black diamond run. That's a good one."
It's a hard-numbers approach to stocks at a time when growth investing has become associated with buying futuristic long-term trends. Not surprisingly, Navellier isn't a fan of that style, saying it's often marketed based on emotion instead of sense.
He adds that investors who use ETFs to play that approach often get burned by fees that enrich the ETF providers while degrading the buyers' returns.
"I'm not anti anything, but I just know that sometimes they're pushing something because somebody wants the names, and if you can have an emotional investment and you can have a basket of stocks, ETF firms are eager for that," he said. "If you don't know what you're doing, you can hurt yourself."
The spreads on ETFs can become extremely unfavorable and can vary dramatically at different times of day, he says. That means they're not really meant to be traded in and out of, even though many investors have come to think of them as easy to enter and exit, just like stocks.
"If you're buying an ETF, go to Morningstar and see what the spread is. It's called the intraday indicative value," he says, explaining that in many cases, "The spreads are tighter in the morning, tighter at the close, but in the middle of day, you could drive a truck through them."
Navellier emphasizes that he's not opposed to buying ETFs and his funds do so — especially because he believes their structure makes them more prone to volatility, so they're sometimes available for steep discounts. But he warns that everyday investors looking for an easy approach need to know what's lurking under the surface.