[💌Weekly update] Record earnings, stock valuation, insider action

A record-breaking earnings season for the US and Europe

According to Factset's analysis, the S&P 500 firms' net profit margin in the quarter was 13%,  the highest recorded by the index since FactSet began monitoring this statistic in 2008. This is high above the 5-year average of 10.6 percent and the previous high of 12.8 percent from March 2021. The European stock market shows a similar trend.

Will companies be able to maintain this level of profitability? Maybe not, which is why we make sure to choose quality companies with the highest possible moat so as to be able to reproduce this kind of profitability over the long run, with or without inflation.

S&P500 Valuations start to make sense

Or does it? You will find analysts that support this theory, and others that do not. Anyway, these are theories, and nobody has a clue of what the market will do over the short to medium term. Plus, these metrics are just averages. I see more and more individual stocks from my watchlist with either fair or modestly undervaluation, based on GuruFocus Fair Value model. I make sure that each new position I open hits the trifecta: quality companies, with fair or undervaluation, and insiders showing confidence by buying shares. The rest is just noise, and noise is not good for my motto: "relax, invest".

Insiders are jumping into the action

My insider buying alerts rang for 8 different tickers this month, with makes it the 4th most busy month in the past 12 months (join the Slack Channel if you want to receive these alerts). This means I dug in many stocks, some new, some already with opened positions. Why does that matter? Because insiders usually jump into the action when they see a low risk/reward ratio. March was the busiest month yet this year in terms of insider buying, and it was the best month to invest indeed, just after the market correction. If you want to know more about insider buying, check this post from last year.

Two stocks I am buying

This week, I added to my Vertex (VTX) position, because after opening my initial position (see why here) 2 weeks ago, Vertex´s CEO bought $2 MM in new shares of the company. That makes it 2 different insiders placing big bets in their company. In the biotech space, this is usually no coincidence. The last time we entered biotech was Editas (EDIT) because of the same pattern (CEO and Director buying shares) and it got us to double our money in 3 months.

I also added to my Mercado Libre (MELI) position, the Amazon of Latin America, because once again fits all the criteria I need: quality company, fairly valued and insider buying.  Remember you can find if a company fits our quality screener by searching it here. If you would like me to add a stock to the database, you can ping me on the slack workspace.

One stock I am watching

I did not sell anything last week, but I am watching closely Zscaler (ZS) and its Cybersecurity peers as it is entering my watch-out zone in my scorecard, mostly because of declining margins and returns, and its valuation which has moved into speculative territory. Most of our Cybersecurity positions suffer from the same frenzy as these are promising growth stocks, but they could easily tumble if the market starts getting rocky. Today I have a position in Zscaler, Okta, Crowdstrike and Fortinet, all these cybersecurity players are highly correlated in terms of stock market performance, but I might close the most financially fragile ones.

That´s it for today, remember to plan, relax and invest.

The author of this post owns shares of CRWD, OKTA, ZS, FTNT, VRTX, MELI. The Rookie Investor has a disclosure policy. This article by The Rookie Investor is not financial advice as it does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. eToro is a multi-asset platform that offers both investing in stocks and crypto assets, as well as trading CFD assets. Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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