Find the Market's "Hidden Diamonds" with a Few Clicks in TradeSmith By Michael Salvatore, Editor, TradeSmith Daily Often in life you’ll hear the phrase “you get what you put in.” Put in a lot of effort and get a great reward; so it goes. Trading the markets is one of those rare things where it’s not necessarily true, though. Because often the simplest methods bear the greatest fruit… or at least, the least volatility. Think about a high-octane, super-active trading strategy. You can spend endless hours and lots of money learning to trade this way. You can engage with the market all day long, trying to make money on tiny scalps from these quick intraday moves. And at the end of the day, you can wind up with less money than you started. You’re trading a ton of effort for no reward – less than a reward, a loss. This situation is why the vast majority of active traders lose money. One study from S&P Dow Jones in 2019 showed that 85% of professional active managers failed to beat the market in the previous 10 years. Meanwhile, you can park your money in an index fund and do better than them. That’s trading almost no effort for an average reward – a much better result. But then you’re settling for average. And because you’re reading this newsletter and not content with your money parked in index funds, average is clearly not your goal. To that end, we have a plan here at TradeSmith to outperform the markets without a tremendous deal of effort. That’s picking stocks with: - Relatively low volatility
- High cash flows
- In sectors set to benefit from the unique macro environment of the moment.
Those first two factors are enough to make a stock a diamond in the rough. Of the thousands of equities traded on the market, a relative handful show these qualities. Then, filtering down to sectors makes the list even smaller. This would normally take a great deal of effort. It’s the kind of investing research Warren Buffett does – and he’s no stranger to due diligence. Thankfully for you, this is the 21st century. Computers, databases, and algorithmic strategy design have made this all a lot easier. And here at TradeSmith, we have designed a kind of “shovel” that helps you easily bring some diamond candidates to the top of the dirt pile. That shovel is Pure Quant – our portfolio-building tool that lets you surface a group of stocks that exhibit certain qualities. Today I want to show you a quick screen I just did for stocks that may prove to be a good bet in the months to come… But first, let’s unpack why I’m focusing on three sectors right now. The Post Rate Cut World The Fed debuted its rate-cut regime last Wednesday – kicking things off with a 50-point cut. That means one thing: The era of rising and high rates is over… at least for now. It’s a significant change. Interest rates affect all part of the economy, and some sectors benefit when they fall – though for different reasons. To keep things simple, let’s focus on three sectors today: - Real Estate: the real estate sector’s impact from interest rates is twofold. For one, high lending costs make it more difficult for people to buy homes, stifling demand from homebuilders and other real estate firms. And for two, high rates dissuade people from buying high-income plays like Real Estate Investment Trusts.
When rates fall, both these factors reverse – people are more willing to initiate mortgages, and they’re less willing to hide out in risk-free income plays like Treasurys. - Consumer Staples: Staples stocks historically do well in lower rate environments, namely due to their essential nature. Rate cuts most often come along with weaker economic periods. While it remains to be seen whether we’re facing tough times, history says we should weight towards consumer staple businesses that will see continued demand in a weak economy.
- Small-caps: Small-cap stocks are more leveraged than large caps – in other words, they borrow more money to fund growth. Quality small-cap stocks should get a boost from lower lending rates, because they can borrow more than they could before.
We’ve been saying all year that small caps could outperform as a result of rate cuts, especially if the economy dodges a steep recession. And through all of these sectors, we should seek dividend payers. That’s because as risk-free yields drop in the post-rate-cut world, dividend-paying companies will becoming increasingly attractive to income-hungry investors. By sifting through the sectors this way, we’ve made our pile to dig through a lot smaller. Now, let’s get to work. To create my watch list: - I had Pure Quant look through companies in the S&P 500, the mid-cap S&P 400, and the small-cap S&P 600.
(I used the S&P 600 rather than the better-known Russell 2000 because the S&P 600 is made up entirely of profitable companies – where you want to be at all times, but especially in a potential downturn.) - I tilted the results towards Consumer Staples and Real Estate companies.
- I also applied our Dividend Leaders screener to show stocks with strong dividends.
And here’s what we get: 
Another cool thing about Pure Quant is that it isn’t just a simple screener. Pure Quant uses each stock’s precise volatility footprint to determine how much you should allocate toward each position, given a starting amount of cash. So not only does Pure Quant serve up a list of high-quality stocks for the environment we face, it includes a blueprint for how to construct a portfolio out of these stocks. And Pure Quant is a perfect example of how to deploy multiple of TradeSmith’s key innovations at once… Just like Eric Fry is doing over at our corporate partner InvestorPlace. Eric is among those who’s being extremely cautious in his stock-picking because he fears the Fed waited too long to cut rates and the table has already been set for a recession. Mainly due to the fact it takes time for lower rates to works their way through the economy. And in the meantime, families are struggling as wages haven’t kept pace with the cost of living… war is raging abroad on multiple fronts… and the U.S. national debt keeps climbing… all while Americans are about to select our next president in an especially contentious election. To help him “sort the signal from the noise,” as they say, Eric is deploying TradeSmith to help him optimize his strategy. After all, it’s not enough to find the right companies for the current macro climate. You’ve also got to buy and sell those stocks at the right time. This Tuesday, Sept. 24 at 8 p.m. Eastern, you can watch Eric’s presentation on his TradeSmith–driven research. It’s free and open to the public, and you can click here to RSVP before the “guest list” fills up. To your health and wealth,  Michael Salvatore
Editor, TradeSmith | 
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