trader

Stock pickers who trade based on company fundamentals have fallen out of favor in recent years amid the rise of passive investing.
The equity-strategy team at Bank of America Merrill Lynch argues that stock-picking is set for a roaring comeback, and offers seven tips for investors looking to take advantage.
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You’ve heard it before. Traditional stock-picking is dead. Long live the machines who rely on complex algorithms to decide what to buy.

Bank of America Merrill Lynch is here to throw water on this simplistic assertion.

While the firm concedes that so-called passive managers — who largely ignore fundamental analysis — will continue to grow in size, it also sees ample opportunity ahead for active investors.

BAML’s take boils down to one main piece of data: Stocks are more differentiated now than they have been since the financial crisis. Those idiosyncrasies, in turn, create price dislocations that can be readily exploited by traders.

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This is shown in the chart below, which also finds that sectors have actually been more differentiated than stocks throughout much of the 10-year bull market — until now.

But ripe conditions aren’t enough for a stock picker to crush the market. They still need to make correct investing decisions. That’s where the equity strategy team at BAML comes in.

Savita Subramanian, who runs US equity and quantitative strategy at the firm, has put together a handy seven-part list of steps investors can take to give themselves the best chance to outperform. They are as follows.

(1) Pick your battles

“Industry groups with high performance dispersion (spreads) and low intra-stock correlations may offer the most opportunity for stock-picking,” BAML said in a recent client note.

The firm notes that the sectors that fit this bill are tech, healthcare, and both consumer staples and discretionary.

(2) Add some ESG

“Overlaying ESG scores to a quantitative framework can also help add alpha and lead to better risk-adjusted returns,” BAML said.

BAML has been stressing for months that ESG is an increasingly important signal for investors. In a September 2018 report, Subramanian predicted that flows into ESG funds over the next few decades “could be roughly equivalent to the size of the S&P 500 today.”

(3) Focus on …read more

Source:: Business Insider

      

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BANK OF AMERICA: Stock-picking conditions are the best since the financial crisis. Here are 7 things investors can do to maximize profits and crush the market.

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