My Indicator To Distinguish The Signal From The Noise
If you have kids, I’m sure you remember what it’s like taking them to the park to play. (I know this might feel like a distant memory depending on where you live, but give it a shot.)
From the perspective of an adult, it’s often loud. But the noise serves a purpose. The kids are making noise to attract attention.
It could be an effort to get another child to throw a ball, or an effort to keep a child from jumping off the swing into a crowd. Noise is part of playing.
As a parent, we often try to tune out the noise so we can respond to the rare but important signal of distress that happens when kids play. (With my boys, it’s not as rare as I’d like it to be.)
Noise is the way a child attracts attention when they are distressed. Maybe they’re hurt or need help because their head went into the monkey bars just fine but is more difficult to get out. As a parent, the noise is unavoidable, but it’s our job to quickly respond to this important noise… what an engineer would call the “signal.”
Stock market analysts face a similar challenge. Part of being an analyst involves seeing through the noise that can be described as hype. I read corporate press releases all the time, and many don’t say anything important. They are just an attempt to attract attention. That’s especially true now when a virus has created an unprecedented series of changes in the economy.
Press releases generally say that the company is navigating through the uncertainty but isn’t sure when the environment will return to normal. In other words, they sound like the background noise of kids on the playground.
Introducing My New Indicator
To spot the signal, I’ve been trying to create an index that captures the current state of the economy. In doing so, I’ve realized that office buildings are an important indicator right now. When the shutdown started, offices closed and Zoom meetings replaced conference rooms. The economy won’t fully recover until offices do. But many of us are afraid to return to the office.
A recent New York Post article noted, “Employees have been allowed back to work in their offices if they want since the June 22 start of Phase Two reopening. But they’re not coming. Occupancy in Midtown is barely 10 percent, even though tenants are obliged to pay 100 percent of the rent.”
Without people in offices, restaurants in Manhattan are struggling. In smaller communities, coffee shops near office buildings are struggling. A full economic recovery can’t take hold until office workers are supporting the businesses that opened near their buildings to support them.
This observation led to the chart below. It’s the relationship between Zoom Video Communications, Inc. (NASDAQ: ZM) and Boston Properties, Inc. (NYSE: BXP), the largest office real estate investment trust (REIT).
When investors expect workers to return to offices, we will see BXP outpace ZM. Although there are signs of a possible peak in the ratio, it hasn’t given a signal that life is returning to normal yet.
How I’m Trading Right Now
Offices aren’t the only part of life that’s changed. Another big change has come from how we pay for things on those rare occasions when we leave the house. That has boosted the outlook for PayPal Holdings, Inc. (NASDAQ: PYPL).
In a recent earnings announcement, PYPL delivered some hype. “Simply put, our business has never been more relevant and important in the midst of the Covid pandemic. We have seen substantial macro changes that we believe will have a lasting and profoundly positive impact on our business.”
More importantly, the numbers support the hype.
Total payment volume — a typical performance measure for payment companies like PYPL or Visa — was up 30% from a year ago. It was also 5.7% better than analysts expected.
Net new active accounts — the number of new accounts it added in the quarter — was 21.3 million. That was larger than the total number of new PayPal accounts added in entire 2016.
PayPal added 1.7 million new merchant users in the quarter, gaining momentum from the shift to online commerce through the lockdown period.
On the consumer side, PayPal’s digital wallet app, Venmo, processed $37 billion in payments. PayPal also unveiled a new partnership with CVS Health to implement the in-store QR-code payment feature it launched in 28 markets around the world in May.
PayPal also issued guidance. For the current quarter, the company expects earnings per share (EPS) of $0.95, forcing analysts to up their estimates, which had averaged $0.86. For the full year, management expects EPS of $3.70, well above analysts’ expectations of $3.38.
Action To Take
Now, most investors would be satisfied to simply buy PYPL and hold the stock. But as I’ve mentioned several times before, I’m happy to make quick income trades that allow me to line my pockets and move on to the next idea.
And given the factors I’ve noted above, I think PYPL is the perfect candidate for a low-risk income trade. To get the exact details of this trade, however, you need to be a member of my premium Income Trader service.
I’m on a mission to put smart investors on the path to generating the income they need in any market. We’ve made successful trades more than 90% of the time, through bull markets and bear markets… without skipping a beat. And our readers have generated instant payouts of $330… $675… $720… and even $1,155…