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Weekend Wisdom

They say "defense wins championships" in sports. Over the last six to nine months, defensive investing has produced great returns. Just look at the consumer staples SPDR and you will see a 19% YTD return with a 2.6% yield.

But the stock market is grinding higher, and now is the time to flip the script and get aggressive.

What do I mean when I say defensive investing? Well it's the dividend and yield chasing investments that have been the hot ticket on Wall Street. Bond yields continue to shrink and investors looking for more cash flow have switched to dividend paying stocks looking to benefit more from price appreciation.

It's not a question of 'if the trade ends' but rather when. At some point, people will want to keep up with or even outperform this market and they will have to accept more risk.


All News Is Good

Over the last few months we have had a wide range of data from the markets. We have seen both good and bad jobs numbers. There has also been both good and bad housing numbers and of course a good and bad statement from the Fed.

Through it all, the market has maintained an upward trajectory, along with some brief pullbacks. So it's easy to say that the market simply isn't looking at the current data. Thus good news comes out and the market goes up, and bad news comes out and the market goes up. Even when no news comes out the market goes up!

Keeping up with that pace means that investors need to think about dumping the divvy and going for growth.

More . . .


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Are You Underperforming?

I have looked hard and long at the stocks in my portfolio, and while there are some impressive gains, I see that there are laggards too. A 15% return over the last 10 months is actually hurting my overall performance.

So it is not just the divvy payers that are getting worked over with a fine tooth comb, it's the underperforming stocks too. In a bull market like this - one that consistently grinds higher - you have to make sure a plus sign isn't the only thing that keeps a stock from being sold.

Selling the stocks that are losers is easy. They are losers. Selling the stocks that are winners, but aren't winning enough is difficult. You want to give it more room to run, but at the same time you can't allow your money to get left behind.


Where I Am Looking

As I look at how I was able to beat the market over the last year, I see that I focused on defensive names with some sprinkles of growth. Most were smaller capitalization companies that had great earnings prospects, but I didn't shy away from the divvy.

Normally, a growth investor does not want to see a company spreading its cash around to the investor base in the form of dividends. They want to see that money pumped back into the core product or to expand sales growth.

Now it's time for a change in strategy. I am focused on getting rid of the dividend payers and underperformers and looking to add higher beta names. If the market is expected to continue to grind higher, I want stocks that will move more than the market moves, so a beta of 1.5 or higher is where I will look. Many tech stocks carry a higher beta.


Starting From Scratch

Getting rid of underperformers means that 25% of the portfolio is about to turn over. It's very much like starting from scratch. The normal cycle will also probably eliminate another 10% of the portfolio. That means about 6-8 new stocks will move into my portfolio in the next 4-5 weeks.

That sort of turnover in such a short amount of time gives me the chance to take advantage of the grind higher. It gives me the chance to separate some more wheat from the chaff.

Playing defense over the last few months has put me in a great position, as I turn to the offensive, I want to focus on higher beta, tech names that will help me outperform a market that is moving higher.


Adding Home Run Stocks to the Mix

If you are looking for some aggressive growth stocks, I invite you to look into my Zacks Home Run Investor. service that has been generating impressive gains.

It aims to narrow down strong Zacks Rank stocks to the few that have exceptional potential to blast through the normal 1 to 3-month profit zone. These are companies that could continue to generate positive earnings surprises quarter after quarter. We typically hold them from 6 to 18 months.

Since the beginning of 2012, this strategy has substantially outperformed the market and currently is riding more than a dozen stocks well into the double digits. One has boomed +150% in just 3 months.

After the market opens Tuesday, May 28, I am preparing to add a stock with that kind of potential upside.

Learn more about Home Run Investor now >>

All the best,

Brian Bolan

Brian is our aggressive growth expert and one of the hottest hands at Zacks who specializes in double-digit stock gains. He is the editor of the Zacks Home Run Investor.

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