The Fed has spoken.

It will raise rates beginning next month.

The markets are down – especially the Nasdaq – as a result.

However, things could get worse – much worse – for one group of stocks. And that is why you need to get out of them or avoid them at all costs.

Let me explain.

When the Federal Reserve raises interest rates, several things happen at the same time.

• Investors get an alternative for their cash.
• Multiples for earnings and sales compress as the hurdle rate for investment returns increases.
• Venture capital money begins to dry up as fears of a recession begin to rise.
• Risky assets lose value relative to value assets that can make money.
• Companies with pricing power come into vogue, rather than companies with “promises.”

You may think that the 15%-to-20% crash in the Nasdaq is an “all clear” sign to step back in.

Well – yes and no.

It’s safe to jump back into some companies – but not others.

In the dot-com crash, companies that were overvalued dropped in value by 90%, while those that were fairly valued dropped by 50%. Winners emerged, but not for years – or in some cases, more than a decade.

Here’s how you determine what to sell and what to hold:

• Sell any company that has a price-to-sales ratio of more than 10.
• Short sell any company with a price-to-sales ratio of more than 30.
• Sell any company that has no path to profitability in the next two to three years.
• Buy any company that is selling at a price-to-earnings ratio of less than 18, especially if it is ALSO paying and raising its dividend.

We are in a new normal, and it’s not going to be pretty if you are still operating under the rules of the old normal.

The new normal requires that you change your thinking now before it is too late.

In a rising-rate cycle, things are different, and this cycle has just begun.

Action Plan: The market is still the place to be, and bargains abound.

But you have to be able to identify true value stocks.

Every Wednesday, we do the hard work for you and put out a new trade idea in Trade of the Day Plus.

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