This System May Not be Sexy, But It Did Lead to Double-Digit Gains in 3 Months

For today’s essay, it would be wise to remember the old investing adage, “The trend is your friend.”

As most investors already know, investing in trends is one of surest ways to success in the stock market. But while the phrase itself is simple enough to understand, we often find that most investors don’t know which trends to follow, or even worse, invest in the wrong ones.

Specifically, we generally find that investors want to focus on economic trends, things like interest rates and global debt/GDP ratios. Some investors go so far as to follow trends based on no real logic at all — trends like the Sports Illustrated swimsuit issue indicator. This “indicator” says that if the cover model for this year’s issue of Sports Illustrated Swimsuit Edition comes from the U.S., the S&P 500 is likely to outperform.

Not to berate the homemade economists of the day, but these investors are most likely wasting their time.

The truth is, economic trends can (and should) be mostly ignored by investors.

Even economists — people who have dedicated their entire lives to following macroeconomics — can’t accurately predict when a major economic event will occur. It took the National Bureau of Economic Research (NBER) 15 months to announce that the recession ended in 2009.

But if not the economy, then what trends should investors focus on?

Michael J. Carr answers that question in his latest issue of Maximum Profit, a trading advisory published by our sister site, StreetAuthority. As Michael recently told his subscribers:

“As investors, it is more important to focus on trends within the stock market rather than trying to beat the experts to a recession call. As the strength of the economy changes, investors move between different sectors in the stock market. Spotting these trends can be more valuable than beating the NBER to announce when a recession starts.

“As the economic cycle progresses, investors become more and less aggressive. This behavior leads to sector rotation in the stock market.”

As one of the largest investment research companies in the country, the experts at StreetAuthority have made careers out of assessing these kinds of trends. From commodities specialist Dave Forest to high-yield expert Nathan Slaughter, there isn’t a corner of the investing universe that doesn’t get covered by at least one of their talented analysts.

Michael has now taken that research one step further.

A few months ago, Michael developed an investing system designed to individually analyze each of the trends that the StreetAuthority analysts are covering. Using this proprietary system, Michael looks at all of the analysts’ recommendations and selects the top-rated stocks with the most potential to outperform the market in the coming months.

The results thus far have been promising.

On Aug. 16, Michael’s system identified a “buy” on Hexcel (NYSE: HXL), a $4 billion industrial manufacturing company with a focus on lightweight materials used to build airplanes and wind turbines.

StreetAuthority analyst Amy Calistri originally identified Hexcel in her August issue of Stock of the Month. At the time, Amy thought growing orders for airplanes would spur demand for the company’s lightweight transportation materials.

Turns out she was right.

On Oct. 22, Hexcel announced third-quarter earnings of $0.48 a share, up 23% from the year-ago quarter. Much of the company’s growth in sales was attributable to increased demand from orders related to Boeing (NYSE: BA) and Airbus planes.

Within that same announcement, the company reported year-to-date operating cash flow of $196 million — a 30% increase over this time last year.

Hexcel’s strong cash flow and steady sales growth has made the company’s stock a consistent performer over the last few years. As Michael noted in his Aug. 16 issue of Maximum Profit:

“[Hexcel] has been moving steadily higher this year. Over the past five years, HXL has gained about 75% while SPDR S&P 500 (NYSE: SPY) has delivered a gain of 46% on a total return basis. Since bottoming in 2009, HXL has outperformed SPY by an even wider margin with a gain of 700% compared to about 150% in SPY.”

The recent performance had boosted the stock’s relative strength (RS) — a technical indicator that measures how a stock is performing against the rest of the market — to 71.2. If you’re familiar with Michael’s system, then you know he won’t recommend a stock unless it has a relative strength rank over 70 (which means it’s outperforming more than 70% of stocks in the market).

As a believer in Amy’s original analysis, the stock’s high relative strength and growing cash flow prompted Michael to recommend the company in his Aug. 16 issue of Maximum Profit.

Since his recommendation, the stock has surged over 20% in less than three months.

That’s the goal of each recommendation in Maximum Profit — to identify stocks currently recommended by StreetAuthority analysts most likely to make big moves to the upside, fast.

So far, so good.

While Hexcel’s 20% gain is impressive, it’s still not the best-performing stock this system has identified thus far.

This month, Michael’s Maximum Profit system identified another company poised for big gains on top of its impressive 5.4% dividend yield. While it’s already gained 40% so far this year, Michael’s system says this stock is still trading at a discount with room to run. To learn more about Michael’s system and how to get access to the latest issue that features this stock now, click here.