How to Avoid the Stocks Everyone Regrets Buying
A case study in “cheap” stocks like UnitedHealth (UNH)…
Before we get started, I wanted to let you know the new episode of my podcast Room to Run is live on Spotify and Apple Podcasts.
In this week’s episode we discussed:
Are we in a new Dot Com Bubble?
My take on Mag7 earnings and the FOMC
Is UnitedHealth (UNH) a buy after its -50% decline?
Which stocks I’m looking to buy “on the dip”
Reviewing my updated market outlook
Each 10-minute episode can be listened to for FREE on Spotify and Apple Podcasts. If you enjoy the podcast, please leave a review.
Everyone wants to catch a falling knife.
When a blue-chip stock falls -50%, investors rush in, calling it a bargain. After all, these are supposed to be the “safe” names… the ones you buy when things get volatile.
But in my experience, cheap stocks are usually cheap for a reason.
The latest “deal” investors keep asking me about? UnitedHealth (UNH), which is now trading at a five-year low.
But after weak earnings and an ongoing DOJ probe, I’m staying far away.
And here’s why you should too.
The Trend Is Not Your Friend
Every investor has tried to catch a falling knife.
And nearly all learn the distinction between a “cheap stock” and a “great opportunity” as a result.
The problem with $UNH isn’t just the DOJ investigation… although that alone is enough to keep me on the sidelines. It’s also that the chart is a mess from a technical perspective. We’re looking at a stock in a clear as day Stage 4 downtrend.
For those unfamiliar with Stan Weinstein’s stage analysis, there are four stages a stock moves through:
Stage 1: Consolidation (flat 200-day MA)
Stage 2: Uptrend (rising 200-day MA)
Stage 3: Top/Distribution (flattening 200-day MA)
Stage 4: Downtrend (falling 200-day MA)
Stage 4 is where $UNH is now. And that’s the last place I want to put money.
Personally, I only trade - and mostly only invest in - stocks in Stage 2 uptrends. It’s the path of least resistance as momentum is working in your favor.
But trying to catch a falling knife in a Stage 4 downtrend? That’s how you make your life harder, not easier.
“Expensive” Isn’t a Dirty Word
Another reason to avoid $UNH is the same reason people want to buy: it’s cheap!
Some of my best trades in my career have come from stocks that looked “expensive” on paper… but were in strong uptrends with huge growth. That includes Palantir Technologies (PLTR), where I turned a $1,400 investment into $15,000.
But Palantir is far from the only stock that fits this bill; think Amazon (AMZN) in 2018, Tesla (TSLA) in 2020, and even Fair Isaac Corp. (FICO) in 2023. The latter is a textbook case in using Weinstein’s stage analysis technique effectively, as we bought it during its Stage 2 uptrend and sold during the Stage 3 distribution for a triple digit gain.
And I’m glad I played it like that, as the stock has moved from a Stage 3 distribution to a Stage 4 downtrend since we sold:
But when I bought, it was a totally different story; $FICO was in clear Stage 2 uptrend. And importantly for our purposes today, it was not trading at a “cheap” valuation. Instead of trading at a 8-times earnings like $UNH is today, it was trading at 80-times earnings.
But you know what? The stock was hitting new highs, had strong earnings momentum, and had an upward sloping 200-day moving average (i.e. Stage 2 uptrend).
Price action tells a story. It’s the number one thing I pay attention to when making a new investment. If the chart is going up, it’s usually because the business is executing, the fundamentals are strong, and investors are willing to pay a premium for that success.
And guess what? Those premiums are often worth it.
Focus on the Winners
Instead of trying to guess where the bottom is on $UNH, I’m focused on companies already winning. I call these stocks “market leaders” and they have made me a ton of money over the last few years (you can get my full list of market leaders by clicking here).
Buying and holding market leaders is a key reason the TikStocks Portfolio has more than doubled the S&P 500 return over the last year
It’s also a reason many of our 1,300 members have also crushed the market, including Peter who is up +44% in the last year:
The fact is, the market rewards leadership. Not companies in the headlines for the wrong reasons. Not companies making five-year lows. And especially not companies in Stage 4 downtrends.
So while $UNH could bounce, I’m not interested in gambling. I’m interested in stacking the odds in my favor. I know some folks think buying $UNH today is like buying Meta Platforms (META) in 2022.
But in my professional opinion, I expect $UNH to have more of a Boeing (BA)-type recovery over the next few years:
If anything, if you’re looking to catch this “falling knife” and buy $UNH, at least wait until the stock starts to “base” or when the 200-day moving average begins to “flatten” and no longer slope downwards.
And most of all, don’t get too hung up with how “cheap” a stock looks on the surface.
Because in investing - just like in life - you get what you pay for.
Stay safe out there,
Robert