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Q & A A Conversation with Ed CarsonA CONVERSATION WITHEd CarsonEd Carson is a News Editor for Investor’sBusiness Daily , where he oversees business, economics and political coverage.He is adept at stock analysis and markettrends, including the impact of economicand geopolitical events on Wall Street.He is also a frequent host of IBD Live, thenew interactive broadcast where IBD’smarket experts break down the first hourof market action every weekday.MarketSmith recently sat down with Edto talk about the state of the market, theyear ahead and how his trading style hasto hedge by betting on a number ofevolved as a result of post-analysis.them, or even buy group-wide ETFs?Which larger trends do you see shapingFor 5G, I’m paying attention to a numberthe market in 2020?of 5G names – AMD (AMD), QualcommEd Carson: With Fed policy stable and(QCOM), Marvell (MRVL), Qorvo (QRVO),an initial China trade deal finalized, theInphi (IPHI), 5G testing firm Keysightbig X-factor for the stock market likelyTechnologies (KEYS) and of coursewill be the 2020 Election. Who will winApple (AAPL). Many of those are currentthe Democratic nomination, who will winmarket winners.in November, and what will that meanfor the economy, regulation and taxes?Chip ETFs such as SMH, SOXX or tripleWithin the stock market, chips and 5Gleveraged SOXL are a good way to getplays look set to be leaders, but whichexposure to semiconductors, if not 5Gother groups will join them? Medicals?specifically.Software?With biotechs, I’m usually too nervousWhen you’re looking for, say, a 5G play,to play individual stocks, even thoughare you trying to pinpoint who the futurethe group looks great right now and aleading stocks will be, or are you lookingnumber of names have been red hot. I12 2020 Q1 Stock Guide MarketSmith.com

A Conversation with Ed Carson Q & Atend to look at ETFs such as IBB or triplepast year, Trump tweets or otherleveraged LABU.China trade news have abruptly sent futures moving sharply lower. So you mightWith software, the IGV ETF is good togo to bed with the futures moving mod-watch. Keep in mind that Microsoftestly, only to wake up with S&P futures(MSFT) is heavily weighted in IGV. MSFTmoving sharply in the other direction.is a big leader, but with its cloud-computing growth, investors don’t seem to beThis issue’s theme is trading post-treating it like a software name anymore.analysis. Which do you learn more from,your winning trades or your losers?When you’re preparing for the nextPost-analysis is important with winningtrading day, how closely do you followand losing trades, but I definitely learnfutures action? Do you feel they aremore from losers. Like many investors,useful, misleading or somewhere inbuying stocks is the easy part. The prob-between?lem is with selling.Well, I write about stock market futuresand other overnight action every marketI’ve had a tendency to wait “just a littleday, so I follow them closely. Futures andlonger” to get a better price or try to holdovernight action in stocks may give youon when I know I should sell, only toan idea of how the market and specificwatch the stock continue to fall and allstocks will open, but won’t necessarilyof a sudden I’m a “long-term investor” intell you what will happen five minutesa loser.after the open, an hour and especiallythe close.I bought CyberArk Software (CYBR) inlate July after it broke out. The initialHere’s a recent example of unpredictabil-buy was fine, and for a few days CYBRity: On December 13th, the stock marketmoved modestly higher. But then theopened slightly lower, as futures predict-cybersecurity stock began selling off. Ied. But then five minutes after the open,should have gotten out right away, andPresident Trump tweeted that we werehad no excuse after it gapped down“VERY CLOSE” to a trade deal with China.below the 50-day/10-week movingShares immediately spiked, with the ma-average line. But I didn’t want to believejor indexes hitting all-time highs. Over thethat the software rally was over. So I keptMarketSmith.com 2020 Q1 Stock Guide13

Q & A A Conversation with Ed Carsons Pictured: CyberArk Software (CYBR).waiting for a recovery. I finally had to sellthen fizzle and I couldn’t pull the trigger?in September as CYBR broke throughits 200-day/40-week line in September,How has post-analysis changed youraround the time that growth stocks intrading style in the years since yougeneral were hammered. That’s the kindstarted?of trade that really makes me focus onI try to take partial profits—either atfollowing sell rules.20%, or when the stock or broadermarket starts to weaken, or heading intoName a few keys to effective post-earnings season. That can give me theanalysis.confidence to hold a winner and not feelIn a broad sense, I seek to recognize mybad about selling a stock if it falls.poor decisions and what drove them—and how to prevent them in the future.I bought Shopify (SHOP) in earlyFebruary right as it was breaking out.I look for patterns in my investing—theThe stock ran up nicely for severalgood and the bad. What kind of stocksweeks, then consolidated in late March/did I buy (slow and steady winners, hotearly April. One day, shares retreated onand wild IPOs, etc.)? When did I buynews of possible competition. The stockthem? When did I sell, in whole or part?never even hit its 50-day line. I probablyshould have held my entire position.Did I take losses on stocks that quicklyPerhaps to calm my nerves I could havefailed—or did I see stocks rise 10% andsold one-third of my holdings.14 2020 Q1 Stock Guide MarketSmith.com

A Conversation with Ed Carson Q & As Pictured: Shopify (SHOP).Instead, I sold my whole position—anda great investor, especially masteringShopify doubled from there.one’s emotions.Confirm or deny this rumor: in a recentUltimately, despite an ever-growingpodcast, you talked for over 30 minutesnumber of Star Wars films, there areabout how investing is like Star Wars.only two great ones. So why worry aboutHeh. Well, there are a lot of simple truthsthe rest. In the stock market, there arein Star Wars, especially the first twothousands of stocks, but only severalmovies, that carry over for investing.dozen are really good at one time andonly a handful are truly great winners.Whether it’s the “piece of junk” Millenni-Focus on the winners, not your “Phan-um Falcon, little Yoda (not Baby Yoda),tom Menace” stocks.or a not-so-sexy stock like salvage carauctioneer Copart (CPRT), don’t judgeWho is your favorite Star Wars character,based on your preconceptions.and why is it Jar-Jar Binks?That’s almost worse than asking, “WhenIt takes time to be a Jedi—as the orig-did you stop kicking your dog?” Myinal trilogy knows, “You have learnedfavorite character is Han Solo. He’s justmuch young Skywalker, but you area great character. He’s funny, cool, brave.not a Jedi yet”—even if you have talent.And he shot first. nThat’s something the new trilogydoesn’t get at all. It takes time to beMarketSmith.com 2020 Q1 Stock Guide15

Stock Screen: Fundamentals SalesFundamentals SalesThis relatively loose screen looks for fundamentally strong stocks (75 CompositeRating) with promising sales growth. Without a strict criterion for EPS, it can findIPOs and Biotechs that might be moving toward profitability.Screen created by Ed Carson, IBD News EditorCOMPANY (SYMBOL)INDUSTRY GROUPCOMP RATINGK L A Corp (KLAC)Elec-Semiconductor Equip99Regeneron Pharmaceutical (REGN)Medical-Biomed/Biotech99Vertex Pharmaceuticals (VRTX)Medical-Biomed/Biotech99Adobe Inc (ADBE)Computer Sftwr-Desktop99Edwards Lifesciences (EW)Medical-Products99Intuitive Surgical Inc (ISRG)Medical-Systems/Equip99Synnex Corp (SNX)Wholesale-Electronics99Cigna Corp (CI)Medical-Managed Care99Visit Investors.com/MSStockGuide to load the criteria for this and otherStock Guide screens directly in to your MarketSmith screener.*All screen results are computer-generated and were run on January 2, 2020. This screen can also be found onmarketsmith.com in shared screens.16 2020 Q1 Stock Guide MarketSmith.com

K L A Corp (KLAC)Fundamentals Sales Stock ScreenMarketSmith.com 2020 Q1 Stock Guide17

Regeneron Pharmaceutical (REGN)Stock Screen: Fundamentals Sales18 2020 Q1 Stock Guide MarketSmith.com

Vertex Pharmaceuticals (VRTX)Fundamentals Sales Stock ScreenMarketSmith.com 2020 Q1 Stock Guide19

Good Trade/Bad Trade Irusha PeirisGood Trade/Bad TradeTHE TRADERIrusha PeirisMarketSmith Senior Product Coachfor small and medium-sized businesses:inventory management, supply chains,marketing and logistics support. One ofthe things that impressed me most wasthat Amazon (AMZN) tried to competeIn this edition of Good Trade / Bad Trade,with Shopify, but eventually stoppedMarketSmith Senior Product Coach (andbecause they couldn’t beat them at theirhost of the Investing with IBD podcast)own game. Later on, Amazon announcedIrusha Peiris shared a couple of his re-a partnership with Shopify instead.cent trades—one winner and one loser—and told us what he learned from each.Technical Picture: When the marketPull up the charts for SHOP and PAYCtook a big hit in December 2018, Shopifyand follow along to see how you wouldwas still in a long consolidation. It was,have handled these trades!frankly, a really ugly base, so I stayedaway at that time. When the market gotGOOD TRADE:SHOPIFY (SHOP)going in January 2019, SHOP started toreally take off. The relative strength linewas nearing new highs; when a stock isThe Timeframe:showing big outperformance in a veryFebruary 2019 – May 2019hot market, it always gets my interest.While it wasn’t coming out of a veryStock Background: Shopify came ontoconstructive base, the story and the sec-my radar in 2017, when it broke outondary confirming factors behind SHOPearly in the year and went on a great,gave me conviction in this trade.great run. So I did a lot of research onShopify during that time while waitingMy Buy Point: February 25, 2019 atfor a proper entry point. During 2018 the187. SHOP hit a new high and reachedstock didn’t fare as well, but I don’t like toa pivot point of 176.60 on February 5,forget about former leading stocks thatbut it quickly retreated and lived mostlymight have another big run in them.below the pivot for the next six tradingsessions. It wasn’t a powerful breakoutShopify provides e-commerce services20 2020 Q1 Stock Guide MarketSmith.comwith big volume like I like to see, so I was

Irusha Peiris Good Trade/Bad TradeSell point:265Buy point:187Six-month Basehesitant to jump in until February 25,did. Still, I should have held on to somewhen it was finally powering out of theof it, since SHOP defied the market trend5% chase zone above the pivot.and marched higher, all the way up to407 in late August. It never even serious-How I Held It: This one was a prettyly tested the 50-day line.easy one to hold. It never fell below the10-week/50-day moving average lines,which I would normally use as a signalto sell some or all of my position. I had aMy 3 Takeaways: After doing my research, I put SHOPin the category of game-changingstocks. I had a lot of convictionin this trade, which helped dispelsome technical doubts I had aboutthe base it emerged from. If you have a profit cushion of over10% and you are a strong believer inthe stock, it can be worth your whileto hold going into earnings. Based on the story and myconviction, I should have held on tosome shares until the stock brokethe 10-week line. That would haveresulted in an 80% gain, as opposedto my 40%.nice profit cushion of about 20% aheadof the earnings report on April 30, soI held my whole position. Which wasfortunate, since it popped almost 8% onthe earnings announcement.My Sell Point: May 6, 2019 at 265. Atthis point, I was up over 40% on theposition and wanted to lock in my gains.At the time, some of my other tradesweren’t working; I was starting to seewarning signs that the broader marketwas weakening. Less than a month later,the Nasdaq was down about 10%, so itmade sense to sell into strength when IMarketSmith.com 2020 Q1 Stock Guide21

Good Trade/Bad Trade Irusha PeirisBAD TRADE:PAYCOM (PAYC)My Buy Point: February 6, 2019 at 174.PAYC reported strong earnings after theclose on February 5, which let me knowThe Time Frame:it could gap up into a buy zone. The nextFebruary 2019 – March 2019day it did just that, so I bought it on thebreakaway gap. The gap up gave meStock Background: I was really intoconviction in the stock that was lackingcloud software stocks around the timefrom the 4th-stage base and the “ho-of this trade, so PAYC was on my radarhum” story.just by virtue of being in the group. Cloudstocks were a big winner in the earlyHow I Held It: From the beginning, this2019 market rally, so I was feeling bullishstock didn’t show a lot of power from theand looking for a new play.initial gap up. It was a modest climber,and it never really tested my stop-lossPaycom provides cloud-based pay-after the second day (which for me wasroll and human resource services tothe low of the gap up day, 166.41). Whilebusinesses. The company does reallyPAYC was going sideways, many ofwell on sales and earnings, but it didn’tmy other stocks were taking off. It wasseem like the most exciting trade ideaunderperforming versus the rest of myto me. Was it a game-changing “best ofportfolio, so I started getting impatient.the best” stock? Maybe not, but I likedthe solid fundamentals and the fact thatMy Sell Point: March 4, 2019 at 177. Asthey were in the cloud space. It was athe old saying goes, “Sometimes stocksmedium-conviction play.wear you out, and sometimes they scareyou out.” This one bored me out. I want-Technical Picture: One thing that madeed to allocate that money to a stock withme nervous about PAYC was that it wasbetter performance, which was basicallybuilding a later-stage base (a 4th-stageevery other stock in my portfolio at theCup with a buy point at 164.18), whichtime. PAYC took a couple of months toincreases the likelihood of a failedreally get going, but by the time it startedbreakout.retrenching into another base, it had"You’ll never buy a big winner without looking at a chart, but you’renever going to hold it correctly if you look at the chart too much."22 2020 Q1 Stock Guide MarketSmith.com

Irusha Peiris Good Trade/Bad TradeBuy point:174Sell point:177Missed this40% runclimbed over 40% from where I bought it.look at the chart too much. Buy itright, have your stop-loss and exitstrategy in place, then be patient letit work. Look at the price at the endof the day, or even the end of theweek. Don’t over-trade.Instead I ended up with a whopping 1.7%gain. Oops.My 3 Takeaways: Boring stocks give me the mosttrouble. But investing should beboring. You’re not looking for big,volatile swings and high emotions.You want steady, constructivegrowth. From Jesse Livermore, words forme to live by: “It never was mythinking that made the big moneyfor me. It always was my sitting.” nYou’ll never buy a big winner withoutlooking at a chart, but you’re nevergoing to hold it correctly if youMarketSmith.com 2020 Q1 Stock Guide23

Stock Screen Accelerating MarginsAccelerating MarginsThis screen selects high-priced stocks over 100 with good liquidityand after-tax profit margins accelerating for 3 quarters.Screen created by Irusha Peiris, MarketSmith Senior Product CoachCOMPANY (SYMBOL)INDUSTRY GROUPRS RATINGDexcom Inc (DXCM)Medical-Systems/Equip97Generac Hldgs Inc (GNRC)Electrical-Power/Equipmt96A S M L Holding N.V. NY (ASML)Elec-Semiconductor Equip94Coupa Software Inc (COUP)Computer Sftwr-Enterprse94Universal Display Corp (OLED)Elec-Misc Products94United Rentals Inc (URI)Comml Svcs-Leasing94Nvidia Corp (NVDA)Elec-Semicondctor Fablss94Murphy USA Inc (MUSA)Retail-Super/Mini Mkts94Visit Investors.com/MSStockGuide to load the criteria for this and otherStock Guide screens directly in to your MarketSmith screener.*All screen results are computer-generated and were run on January 2, 2020. This screen can also be found onmarketsmith.com in shared screens.24 2020 Q1 Stock Guide MarketSmith.com

Dexcom Inc (DXCM)Accelerating Margins Stock ScreenMarketSmith.com 2020 Q1 Stock Guide25

Generac Hldgs Inc (GNRC)Stock Screen Accelerating Margins26 2020 Q1 Stock Guide MarketSmith.com

A S M L Holding N.V. NY (ASML)Accelerating Margins Stock ScreenMarketSmith.com 2020 Q1 Stock Guide27

Ask a Portfolio Manager Charles HarrisAsk a Portfolio ManagerCharles Harris is a Senior Vice Presidentand Portfolio Manager at O’Neil CapitalManagement. In addition to his duties asa portfolio manager, Charles has participated in numerous model book studiesand has been a featured speaker at theCAN SLIM Masters Program.Keeping with this issue’s theme, we askedCharles about post-analysis.The market makes it very easy to know ifyou’re right or wrong: simply put, if you’reStock Guide: After analyzing your tradesdown on the trade then you’re wrong, atfrom last year, what’s one lesson you feelleast temporarily.like you’re still learning?Rather than focus on being right or wrong,Charles Harris: One lesson that I’m stillfocus on making money. As a trader, youlearning is to never get emotionally at-will likely lose money on at least 35% totached to a stock or to a thesis, regardless40% of your trades over the long term.of how well researched it is or how soundWith those kinds of odds, it is imperativethe analysis.to cut losses quickly and without hesitation. As Bill O’Neil said, you must beAs a trader or an investor, it’s critical to al-flexible and “bend like a tree in the wind.”ways allow the market itself to be the finalarbiter of whether your trade is right orIt’s helpful to think in terms of probabili-wrong. Your ego will devise the most elab-ties. Don’t focus on the results of any sin-orate justifications and rationalizationsgle trade, but rather the process of trading.to keep you in a losing trade because theIf you get the process right, then you willego does not want to be proved wrong.be a net winner over many trades. nHave a question for a professional portfolio manager? Email us atreachus@marketsmith.com and we might include your question in a future issue!28 2020 Q1 Stock Guide MarketSmith.com

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he learned about his trading style from post-analysis. Last but not least, Ed explained his theory of how investing is a lot like Star Wars (no, seriously). In Good Trade / Bad Trade, MarketSmith Senior Product Coach Irusha Peiris opens the books on two of his recent trades. He found succ