How to identify high-upside stocks?

+ tips for end-of-year donations

Issue #17. 

Hope you all had a wonderful Thanksgiving break, and welcome to our issue #17! In this week’s edition of the Gist, we’ll discuss high-upside stocks, tips for end-of-year charitable contributions & why investing in bonds may be a better alternative to high-yield cash.

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So here are the questions for today’s edition: 

  1. What are the stocks with a high analyst upside, and should I invest in those?

  2. What are some considerations for end-of-year donations / charitable contributions?

  3. Why do I need bonds at all in my portfolio when I can pick up a cash yield that's competitive and get away from all that interest-rate risk?

Let’s give you the summary first.

Summary

  1. Price targets alone are probably not a very strong indicator of stock appreciation potential. However, they could be useful to investors as a gauge of equity analysts’ sentiment—more so than stock ratings. Here is the tool that can help you identify securities with the highest upside potential by sector for large cap, medium-cap and small-cap stocks.

  2. Here are three quick tips for charitable givings at the end of the year: ask for a receipt for any contribution above $250. “Bunch” your contributions (or generally speaking deductions), so that you can itemize them on your 2019 tax return. And donate stock instead of cash to help with your tax savings. Below is an example from Schwab on charitable contributions and tax implications by a married couple filing jointly, in the 32% tax bracket, who wants to donate $100,000 in cash vs. stock.

  3. Keeping significant amounts of cash in your investment account will result in below-inflation returns. You can invest your cash in a high-yield savings account that has a competitive rate, but keep in mind that your yield will be a function of the interest rate and will not necessarily beat the inflation rate. Although bonds have not appreciated as much as stocks in the past, they are a significant source of diversification to an all-equity portfolio, and have outpaced money market and high-yield savings returns (the aggregate bond index 10-year return is 3.44%).  

Deep Dive

  1. Analyst ratings have limited value, because they are opinion based. While one analyst may rate a stock as a “sell”, another may recommend it as a “buy”. More importantly, a rating may not equally apply to every investor, because people have different investment goals and risk tolerance levels, which is why target prices can be so essential to rounding out research.

    The tools for upside identification are meant to be just one data point for your stock research. Energy stocks are over-represented in this view, simply because energy as a sector has generated below-average returns in 2019, and analysts believe they have significant appreciation potential. You may also notice a few healthcare and biotech stocks in the upside screener—and most analysts would agree that healthcare and biotech will continue to be growth drivers in the US economy.

  2. Here are our end-of-year contribution ‘tips’ explained in a little more detail:

    • Request a receipt if you make a donation of $250 or more to a single charity. If the donation is in cash, you'll still need a receipt or supporting bank records.

    • Donating investments (e.g., appreciated securities) instead of cash can be a tax-efficient way to support a charity. Generally, if your assets have appreciated in value, it’s best not to sell securities to generate the cash you need for a donation. Contributing the securities directly to the charity increases the amount of your gift as well as your deduction.

    • If you've got a charitable cause you know you want to support next year, then consider donating what you would have given the organization next year before the end of this year. This strategy is known as bunching and can lower your tax bill (by allowing you to itemize deductions). If you still want to donate but are not sure yet who you want to support, you could put those contributions in a donor-advised fund, which lets you invest money that will eventually be distributed to a nonprofit.  

  3. Bonds are the shock absorber during very volatile market environments. Investors who want to keep cash instead need to sense correctly when is the right time to move to cash, and when will be the next right time to move back into fixed income or equity. The research has shown that calling future market environments is very challenging for professional investors, let alone retail investors. Hence it may be better to invest a portion of your portfolio in bonds vs. keeping it in cash and moving it in and out of it based on your own judgement.

That’s it for this edition.  What would you like to hear about in the next Gist?  Ask us a question here.

The AskFinny Team