Themes Can Be Music to Your Portfolio
Source: James
Superior trading results are a function of being in the right stocks at the right time. There are always stocks with good fundamentals or a good story, but if you don't time them right it won't help you much. The best way to beat the market is to find the hottest stocks in the best sectors. They tend to move faster, further and for longer than you might think.
Themes are usually based on sectors. Recently, we saw the financials make a strong run as a result of the election, but they are constantly shifting and we have to work hard to identify which ones have the best potential.
Some of the sectors that have done well recently are oil, precious metals, steel and the big-technology FANG names. While they have had some good moves, they have not been nearly as strong as some of the themes in the past such as China-related names, solar energy, cloud computing and even internet stocks back in 1999-2000.
Although there aren't any crazy-strong themes right now, there are still some areas that are showing promise. One group that it is at the top of my list is optical networking stocks. They are all about moving big amounts of data at faster speeds. With the bandwidth demand of services like Netflix (NFLX) and increased use of cloud computers, there is high demand for faster and more efficient networks, which is what optical does.
Once we identify a theme like this, the next step is to review the stocks in the sector. Some of the optical stocks that are on the radar are Finisar (FNSR) , Ciena (CIEN) , Applied Optoelectronics (AAOI) , Lumentum Holdings (LITE) , Acacia (ACIA) , Viavi Solutions (VIAV) , Oclara (OCLR) , AXT (AXTI) and a number of others.
After we have identified the top stocks in a strong sector, the next step is to study the charts. On the list above, the charts that are showing the best relative strength are CIEN, AAOI, OCLR, AXTI and VIAV. I now want to look at the earnings growth and find out when the next quarterly report is due.
OCLR, one my favorites, just pre-announced a strong report, so there won't be any real risk when it reports on Jan. 31. The company is looking at a jump of 218% in its earnings in the fiscal year ended 2017, which looks quite attractive. This will be one of my go-to names when the optical theme shows renewed strength.
I'm using the optical stocks here as an example of how you might play a theme. The group isn't nearly as strong as I'd like for this approach, but it shows how it can work when a sector becomes popular with traders.
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