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Your Stock Buying Checklist � A Review

step-by-step guide to finding stocks with the characteristics that make them market winners. This lesson reviews stock buying concepts presented in this course.  

Investor's Business Daily's Key Buy Rules

#1. Top Fundamentals

Concentrate your buys in the No. 1 company within its particular industry in terms of sales and earnings growth, profit margins, return on equity (ROE) and relative price performance. A leader should have the characteristics shared by the best stocks before they made their major price moves:

  • At least a 25% increase in the most recent quarter's earnings per share (EPS) vs. the same period in the year earlier.
  • Ideally, accelerating earnings growth in the three most recent quarters.
  • At least a 25% increase in annual EPS in each of the past three years.
  • The most profitable companies have Earnings Per Share Ratings of at least 80 or 85.
  • Sales growth should be up at least 25% in the most recent quarter, or accelerating over the past few quarters, or both.
  • The most profitable companies tend to have annual ROE of 17% or higher.
  • Pretax and after-tax margins should be improving and near their historic peak.
  • Stocks should have Sales+Margins+ROE (SMR™) Ratings of A or B, which means they are in the top 20% or top 40% of stocks, respectively, in terms of sales growth, profit margins and ROE.

#2. Leaders In Leading Industries

Historically, the best stocks ranked among the top of the market before making their huge advances. Also, stocks often go up in price as part of a top-performing industry group.

  • Look for a Relative Price Strength Rating of at least 80.
  • Look for stocks within the top 40-50 groups shown in IBD's 197 Industry Group Rankings.

#3. Institutional Demand

When mutual funds and other professional investors start buying a stock, it represents heavy demand that tends to lift stock prices higher.

  • Pay close attention to stocks with Accumulation/Distribution Ratings of A or B. C-rated stocks may be O.K.
  • It is also desirable to see an increase in the number of mutual funds owning the stock over the past few quarters. It's even better if a stock shows up on the list of "New Buys" or "Largest Holdings" of top-performing mutual funds.
  • Avoid low-priced stocks, which are typically shunned by institutional investors. Focus on NYSE stocks $20 or more and Nasdaq stocks $15 or more. These were the minimum price levels among most of the greatest stock market winners when they began their major moves.
  • Put another way, focus on stocks with Industry Group Relative Strength Ratings of A or B.
  • Check market leadership by studying the top five or six sectors in IBD's table of new 52-week highs.
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