How to Find a New Core Holding for 2024
Ahead of a shortened trading week, it’s important to review how to find a new core holding for 2024 as earnings results start to hit Wall Street. While the earnings season has already begun with major financials reporting, the upcoming week has relatively few companies reporting with significant implied moves in the options markets. So, what should you be looking for in a potential core holding for 2024?
What to Look For
When considering a potential core holding, there are several key factors to consider:
- Strong Balance Sheet: A quality company typically has low debt, high liquidity, and a solid capital structure.
- Consistent Earnings Growth: Look for companies with steady and predictable earnings growth.
- High Profit Margins: A track record of high profit margins can indicate a competitive advantage.
- Good Management: Assess the company’s management through their strategic decisions, corporate governance, history of delivering on promises, and alignment with shareholder interests.
- Competitive Advantage: Look for companies with sustainable competitive advantages such as patents, unique technology, or market dominance.
- Sustainable Business: Consider how well-prepared the company is for future challenges and market trends.
- Valuation: While not a direct measure of quality, valuation metrics like price-to-earnings and free cash flow yield can help ensure you’re not overpaying for quality.
- Resilience in Downturns: Quality companies tend to demonstrate resilience during economic downturns compared to weaker companies.
- Sector and Industry Position: Consider the company’s position within its sector and broader industry dynamics.
- Historical Performance: While past performance doesn’t guarantee future results, a history of outperforming peers and the market can be a positive sign.
Using these guidelines, let’s examine the communications sector to find potential core holdings.
Potential Candidates in the Communications Sector
The communications services sector includes companies like AT&T, Alphabet, Comcast, Netflix, and Walt Disney. While AT&T may be cheap in terms of valuation, it has significant debt and stagnant revenues. On the other hand, Alphabet has a strong balance sheet, forecasted growth, and a meaningful presence in growing industries. With a solid management team and historical performance, Alphabet ticks all the boxes for a potential core holding.
Considerations for Alphabet
However, it’s worth noting that Alphabet’s stock is approaching its all-time highs. If it reaches resistance at that level, it may be an opportunity to sell covered calls against a core long position. Additionally, if you’re hesitant to chase after the recent rally but still want exposure to Alphabet, consider an in-the-money call spread as an alternative to purchasing the underlying shares.
Hot Take: Finding Quality Companies for Your Portfolio
When looking for new core holdings for your portfolio, it’s essential to consider factors like balance sheet strength, earnings growth, profit margins, management quality, competitive advantage, sustainability, valuation, resilience in downturns, industry position, and historical performance. By examining these criteria within specific sectors such as communications services, you can identify potential core holdings like Alphabet that meet these requirements. Remember to stay informed about market trends and make investment decisions based on thorough research and analysis.
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